Opening Keynote Fireside Chat: Navigating Change, Defining Success -- A Conversation with Jenny Johnson

Keynote Fireside Introduction Sponsored by: Appian

In this fireside chat, American Banker Editor-in-Chief Chana Schoenberger interviews Franklin Templeton President and CEO Jenny Johnson on how she navigates change in the asset management industry.

Transcription:

Alexis Kane (00:07):

Hello everyone. Good afternoon. My name is Alexis Kane and I am a Senior Solutions Consultant at Appian. I am thrilled and honored today to be introducing our truly exceptional keynote speaker today, Jenny Johnson. As we come together to celebrate innovation, leadership, and the pursuit of greatness, we are lucky to hear from Jenny today a little bit about Jenny. She is a Titan in the finance world and holds the impressive titles of President and CEO at Franklin Templeton. Her career spans 35 phenomenal years, and she's played a pivotal role in turning Franklin Templeton into one of the world's largest global investment managers with a jaw dropping 1.4 trillion in assets under management. What makes Jenny stand out though is her unwavering dedication to her craft. She's worn many leadership hats in the financial world from investment management and distribution to technology and wealth management. Her journey to becoming CEO in February of 2020 is a testament to her leadership and strategic skills.

(01:18)

Under her leadership, Franklin Templeton has transformed remarkably, she's diversified the company's investment capabilities and expanded its range of solutions, always keeping clients at the forefront. But Jenny's influence extends far beyond the boardroom. She's a member of several influential boards, including the International advisory Panel of the Monetary Authority of Singapore and the New York Stock Exchange Board Advisory Council. She was even appointed to the US prevails CEO forum in 2023. She also serves on the boards of the Memorial Sloan Kettering Cancer Foundation, Therma Fisher Scientific and Catalyst among others. Jenny Johnson's academic background is as impressive as her professional journey. She earned her Bachelor of Arts and economics from the University of California at Davis, where she likely began to pave her path to success. Today we're fortunate to have Jenny Johnson with us, not just as a finance powerhouse, but as a symbol of determination and leadership for us all. Her story reminds us of the power of vision, hard work, and the commitment to excellence. Now without further ado, I'd like to have Jenny and Shauna come back to the stage.

Jenny Johnson (02:36):

Trust me, my academic career was not that impressive. My children found my report cards and that was a bad day.

Chana Schoenberger (02:46):

But it was harder. It was harder than it's now.

Jenny Johnson (02:50):

It was totally harder. That's what I told them.

Chana Schoenberger (02:52):

Definitely. Okay, so as we were just talking in that intro, you have a super impressive career over the last 35 years and you're carrying on a family legacy in your business. Tell us about your career journey. How are you making this company your own? You've been CEO for three years now?

Jenny Johnson (03:13):

Yeah, so just a little background. I'm Franklin Templeton. My grandfather started the company. He actually had a mid-size brokerage business that he had started in the thirties. And my father, when he got out of the military said his older brother had taken over the brokerage business and he said, Hey, I want to do my own thing. Can I take over this little subsidiary Franklin Funds? At the time, it was two and a half million dollars in assets and there was a part-time employee with $10,000 in revenue. So it's always my grandfather credited with starting the business, but really my father grew the business. Today we're a public company. The family and employees control about 43% of the stock, which I think is a real advantage in today's environment as a public company. And my father was CEO for a long time. My brother was CEO, and then I took over in 2020 as CEO. And many people expected me to run the company the same way as my brother did. And everybody's different. He's Executive Chairman, great supporter, but I definitely am running it the way that makes sense for me to run it. When you're number two, your job is to support, number one, when you're number one, your job is to figure out how to pave the way with your leadership.

Chana Schoenberger (04:34):

Also, anyone who has children or even siblings could tell you that any two siblings would never do anything the same way.

Jenny Johnson (04:40):

I know, but it really surprised me actually. It was immediately assumed that I would do it the same way that it had been done before. And I think everybody you see anytime there's an internal CEO candidate, they move in and they've played the role of supporting the existing CEO and then when they're selected, they're selected because they have their vision of where the business wants to go.

Chana Schoenberger (05:03):

You turned out to be your own person.

Jenny Johnson (05:05):

Hopefully.

Chana Schoenberger (05:07):

Can you give us an example of one thing that you did that was a hundred percent you?

Jenny Johnson (05:12):

Well, I mean in fairness, so since I became CEO, we've done 10 acquisitions. The largest one was a company called Leg Mason where we doubled the size, but we are now the seventh largest alternatives manager. Many people are not aware of that, and that was somewhat of an extension of plans that we had of just a recognition of a trend of how important private markets are becoming and have become. And then the other piece is I ran technology for a long time, and so I've been really passionate about that. So I would say kind of innovation and my stamp on things like blockchain, digital assets, diving into ai, some of the stuff we've done that was probably very different than perhaps the way we had done things in the past.

Chana Schoenberger (06:00):

Well, let's come back to that in a second. So Franklin Templeton, I think that the people who have heard of the company on a corporate level, think of it as a mutual fund company, which is what you're most famous for, but you have been leaning directly into emerging trends like direct indexing, other types of customization, which is sort of the big trend in wealth management right now. Wealthy people have been doing this forever. Retail investors are only just now getting this. What does the future look like for the industry as they're moving in this direction?

Jenny Johnson (06:32):

So I mean, I think the two probably most significant trends are technologies enabling personalization. And so personalization is going to drive things like direct indexing where you essentially have a personalized investment account that may be some traditional investment mandate that's then overlaid with your passion. So maybe gender diversity is really important to you. So you can take whatever, let's just say it's an index, you can then overweight certain gender features or you want net zero because you're worried about the environment. So energy transition. So you can weight those things. And so I do think that the financial advisor will eventually basically say to the clients, here's your portfolio returns and how you've done versus whatever the benchmark index, but that'll become less important. And by the way, here's the risks that are inherent in these returns from A ESG standpoint, and here's the impact your portfolio is making and it requires a lot of information and the ability to customize.

(07:40)

But I think all that converges to a real customization that happens for individual clients. The second trend is this move towards alternatives. The reality is post the financial crisis, banks are just you guys, many of you're bankers, banks are not lending, they aren't the primary sources of lending these days. They don't want to use their capital for just everybody. Their capital is so expensive and precious that they preserve it for their best customers. So what's happened is you've seen this massive private credit market created today. We managed 78 billion in private credit post the SVB blowup. You're seeing the area in banking that was still doing a fair bit of lending was the regional banks, especially in the real estate sector, they're now pulling back. And so that gap is being filled by private credit managers who skill is not just about underwriting, but skill is actually origination of deals and loans.

(08:41)

The second thing, I mean we've seen it with private equity. I think a lot of private equity was fueled by the zero interest rate environment, but I also think companies with the ability to stay private, they're choosing to stay private longer because there is so much pressure on quarterly earnings for a public company, CEO. And in times of great technological change, you need to be investing in things that may not pay off for five to 10 years. And so if you can choose to stay private and make investments in the business, then you're doing it and you see it in the numbers. In 2000, granted an anomaly average company went public after three years by, I think it was 2019, that number was nine to 10 years. And by 2022 that was 14 to 15 years. So in companies waiting to go public, you're creating this huge opportunity in the private equity space.

(09:35)

And so our decision to move into the private assets is just a recognition that our clients want to invest there. And from an investible universe, you have half the number of public companies as you did in 2000, you needed to expand your investment opportunities. So I think that was the second big trend that we looked at and said, we need to figure out a way to play in this space. And it can be hard. There can be clashes between traditional investment approaches and the culture of alternative managers. So you got to figure out a way to manage that appropriately.

Chana Schoenberger (10:09):

Interesting. Yeah. So for retail investors, I mean it's not like they're doing their own due diligence. They read the fact sheets and that's pretty much as much as they can or are expected to do. How do they figure out what private credit or the retail private equity funds are like for them?

Jenny Johnson (10:27):

Well, so this is the big challenge, right? Because to put it in perspective, so the good news is you get paid to be in fixed income now. So if your risk-free rates, say five five point a half, your high yield, you can get on average 8.7% in private credit, you can get 11.5 to 12 point half percent. Those are starting to be equity returns in the debt structure. So that's really great. The problem is probably your money's locked up for at least five years or more. So that illiquidity premium is expensive and it's really difficult for, we're big believers in the financial advisor playing that role with the client, but for the financial advisor, they have to decide which of their clients can withstand that illiquidity the nature of those assets. Because if they put the client from a suitability standpoint in the wrong type of investments, guess who's coming after them, FINRA is coming after them, they're going to be in a lot of trouble.

(11:29)

So it's really complicated yet to not try to solve the problem of bringing those excess returns to that wealth channel is a real missed opportunity. And so there's been a lot of innovation around how to think about interval funds are a good way where you can still get out a certain percentage. We actually got in the venture business because our growth equity team, our Franklin growth group was recognizing that where they used to get these IPO kickers and returns, they weren't seeing. And so a mutual fund can have up to 15% in illiquid assets. So they started to do late stage venture deals, and then what happened was, so they were late stage venture inside mutual funds. And then what happened was clients actually came to us and said, Hey, you're doing this. We see the deals you're in. Will you manage portfolios for us?

(12:19)

And so we ended up creating some venture funds and honestly, some of our best deals are the deals we didn't go in because the venture team is part of the growth equity team and there'd be a late stage deal where the VCs are all convincing them why it should be priced at this. And the public guys are like, look at the public market equivalent. I don't think this could trade here. You saw it with Instacart. I think that that was one where somebody said the late stage deals were at almost a hundred dollars a share, and I think the IPO came at it like 33. So being able to bring those together and the same thing on the fixed income side, traditional and private credit, I think there's a real opportunity to think about them as an asset class and figure out how to structure products taking advantage of the unique characteristics of each of those.

Chana Schoenberger (13:06):

So are we moving toward a place where most of this financing is done privately, it's not in the public markets anymore?

Jenny Johnson (13:14):

Well, I think a lot of mean, honestly, you look at, that's one of the concerns around real estate and the pressure and the real estate, which was the regional banks were I think 50% of the real estate debt and they've retreated. So I think it remains to be seen. It's not going away for sure. I mean, what was the response of the regulators to SVB blowing up? It was raising the capital requirements of the big banks. So now it's even more expensive. Your more expensive. So you're going to really preserve it for your best customers. And that leaves this great opportunity for the mid-market kind of businesses to be able to get financing through these other entities.

Chana Schoenberger (13:59):

The fed's role in the banking crisis has been sort of debated, and you have views on this. Tell us what your views are.

Jenny Johnson (14:09):

Somebody once said to me, Jenny, why would you say that? There's no upside for you telling your opinion on this topic, but I can't help myself. Look, the thing that had bothered me a little bit about SVB is that it was too easy to just say this was a risk management asset liability problem. These guys should have known, you just have to kind of put yourself back for a minute. Let's all remember in 2020 everybody, I mean it was the rare, and I know it because our Franklin fixed income, CIO was she said it was almost embarrassing to make the statement she was making. And some of our other investment teams absolutely were along with this. Remember, inflation was transitory, this is temporary, don't worry about it. It's not going to be a problem.

Chana Schoenberger (14:53):

Your sweet Green Bowl is really not $20.

Jenny Johnson (14:56):

Exactly. It's going to be, trust me, it's coming back. The fed's balance sheet in 2020 was 4.1 trillion. It had been increased from 800 billion to 4.1 trillion in 2020. At that point, SVB interest, interest rate's zero. The 10 year is going out to 1.39% or something. You're not using your balance sheet to lend to customers. You're investing in US treasuries because honestly, post the financial crisis that kind of became the incentive was to invest in US treasuries. And so they go longer on the curve to get some sort of return. Meanwhile, the fed balance sheet goes from 4.1 trillion to just under $9 trillion. Think about the geopolitical environment that pumped a bunch of money in the system in a two year window, $5 trillion essentially pumped out there. And then suddenly we have a different view on what inflation is, and it's probably here longer. And I think the Fed then realized, okay, we're behind the curve here.

(15:53)

And at that point they jam on the brakes and it is unprecedented to have interest rates go up 5% in an 18 month window. And we all talked about it seems like things are okay, but you never know what the unintended consequences are. And I do think that Silicon Valley Bank was one of those unintended consequences where you suddenly had a huge amount of loan losses on your US treasury portfolio. This wasn't like bad loans to people like the financial crisis. This is a US government on the other side of that. And so I think that, I don't know that there was enough discussion about everybody kind of in retrospect was you should have known, but I think it would've been a little bit hard to know. And then honestly, I think there's other factors in there. I do think that banking is a business of confidence.

(16:43)

And when they went out to raise capital, only 20% was raised, and then the message to the market was, we're going to raise the other 80%. That's a problem in banking. That's the last thing you need. And then of course, you had a well-respected entrepreneur saying, boy, that's a scary message when they got to go raise 80% of capital. And then there is not a bank out there who could have withstood 40% of their deposits being withdrawn in one hour. Nobody really understood this whole mechanism, how easy it is to move money out. And so every bank would've had a problem. JP Morgan Chase would've a problem if 40% of their assets came out. You just don't manage a bank that way. And so my only message here is I think it's a little unfair to blame it completely that the management team should have known. Sure, they should have done some things differently, but there was a lot of factors. There's a lot of blame, I think, to go around in that environment.

Chana Schoenberger (17:40):

It was pretty scary. I think that we had Maya Polis who became the CEO of one of the failed banks. I think he said something like, he came on an interview with me, something like 42 billion left in a day. It's a lot.

Jenny Johnson (17:57):

Yeah. It's a lot. But again, and the other side of this is you'll hear people saying, well, the government had to bail them out.

Jenny Johnson (18:04):

Well, the government's kind of bailing themselves out. They're the ones who, if the depositors pull their money out, you're selling the US government treasuries at a further loss. I mean, it's still US treasuries. So I think it was, first of all, I think the Fed did exactly the right thing, which was to stand in immediately and say, this is not a, and give them a lot of credit for how quickly they moved in and said, we're going to protect all depositors because that would've turned into a real problem. And so I think they had gotten the playbook from the GFI and they knew to use it quickly, and to PAL'S credit, they stepped in immediately and did it. And I think that that saved us from a lot of additional issues.

Chana Schoenberger (18:47):

So what happens next.

Jenny Johnson (18:49):

As far as what?

Chana Schoenberger (18:50):

Fed wise inflation interest rates.

Jenny Johnson (18:55):

At Franklin Templeton, we have Franklin fixed income, we have Brandywine fixed income, we have Templeton Fixed Income, and we have Western Asset Management. And I can tell you all four of the CIOs have a slightly different view on this. So a little bit of, when I say this means I have to pick my favorite child who I agree with because they don't all agree with this position. But I think that number one, I think you are going to see another 25 basis point increase. I think that 2024 if it weren't an election year, honestly, my instinct is even though they're starting to see some around the edges, the consumer being a little bit rockier, consumers still really strong. I think it would be hard for them to decrease rates. But because honestly, it's an election year, there's always add different things that it'll be the second half.

(19:47)

I think the market is optimistic to think they're going to get a rate cut in the first half of 24. I think it's probably not even going to drop as much as the market thinks. And I think inflation is going to be harder to get under control. There's still a lot of money that's been pumped to the system and a lot more that's still coming in that is just going to make it harder. And then think about what's inflationary. Look at oil at, I don't know what is $90 a barrel. Now think about the union strikes, right? Those are inflationary when it comes to wages, and it's probably not, if the Auto Workers Union is successful, it just might bleed over to other unions. So I think there are things out there that are putting pressure to make it difficult for the Fed to fully get this down to the 2% that they hope to get it to.

Chana Schoenberger (20:39):

So you were talking a minute ago about how you used to be involved in technology, and you've said that you spend about 30% of your time on disruption, which means you have a big broom and you just sweep everything out. And you've talked a lot about opportunities in the digital asset space. Why and what's exciting?

Jenny Johnson (21:00):

So first of all, I think this is one of the benefits to being part of a family legacy in a business in that I really do think in terms of, I don't want it to be the fourth generation going, man, we had a really great thing going until Jenny blew it. It was so obvious that that disruption was happening. So there's probably a part of me that's a little paranoid, but I genuinely believe that blockchain is going to, I always say that Bitcoin is the greatest distraction from the greatest disruption that is coming to financial services. And that does not mean that I am totally negative on Bitcoin. That is a whole different discussion. And too often when you get into the discussion about blockchain, you go down a rabbit hole about debating about Bitcoin. So let's talk about why. And just so you know, so Franklin Templeton has a, we are the first to get a 40 ACT mutual fund approved on chain.

(21:53)

So we have a tokenized money market fund, and we built a shareholder record keeping system on chain, and we have a cold hot storage wallet that we maintain those tokens in. And we built that because we wanted to make sure we understood the space. We also are node validator on five nodes. We have a venture fund, we do active management, SMA strategies on coins. So it's an area of focus, so why should you care about it? One is, I genuinely believe that ETFs will eventually be expressed in a token form today, an ETF is out there and everybody says it's so great and important because it trades all day. Mutual fund, you get priced at the end of the day, ETF trades all day, but it only prices twice a day. So you're buying it with actually an information gap and a token, because it has a smart contract, can immediately give you the net asset value of the underlying assets at the point.

(22:48)

So why wouldn't you want that? Plus, it'll trade 24 by seven. All of our banking system is running on a bunch of old technologies. Everybody has a mainframe out there that they're painfully paying the monopolist on mainframes say that. And they do batch processing and they're slow and they're really expensive because old technology blockchain, because it does three things. So I'll talk about our business, why becomes sports? It's doing three things. One is it has a payment mechanism. Two is it has the ability to execute smart contracts. And three is, it's a general ledger, which means the source of truth. So why does that matter? My favorite example is Rihanna's, NFT. So Rihanna came out with her tokens. She sold 300. Each one is worth the royalty rights of 0.00033% on one of her songs. Why can she do that? Because when Spotify, when you play her song on Spotify, Spotify's can execute.

(23:49)

The token executes the smart contract. It says, oh, Chana has the, she's a huge Rihanna fan, so she owns this token. I'm going to execute the contract, pay her fractions of pennies for that particular royalty on that one song. And I know that because she has the token in her wallet that she has the rights to all that. So that token represents ownership of a building. You don't have to go to a title company that the rights are in there. So it's going to open up new types of investment opportunities because it takes the frictional costs out of transactions. So much of what the financial services business is, is this movement of transactions and people getting paid in the process, kind of toll takers along the way. It's a threat to sort of the incumbents in that space, but also those who embrace it can have a lot of interesting opportunities.

(24:45)

So think about things like athletes will be able to sell future revenue. They could sign a big a hundred million, $300 million contract, and they could say, I'm going to sell to my fans 5% of my future earnings, and the fam will probably pay a premium to have bragging rights. And the fans can trade those tokens and the athlete never has to worry about it. The smart contract executes and pays the tokens when the payments are made. So you're starting to see new, interesting, uncorrelated investment opportunities. There's a company that, and honestly, the skills of portfolio managers are going to change. They're going to have to be experts in things that the traditional portfolio manager didn't have to do. So there's one guy who I guess discovered Messi and some other famous soccer players, and he's put together a fund represented in tokens where he's buying up the image rights of young athletes. So he's betting on who are the future athletes, paying those athletes upfront for basically the right to their image going forward and think about the image in eGames and other things. So these are investment opportunities that we've never been able to access in the past that this technology is going to open up, and I think it's going to be important to know that space.

Chana Schoenberger (26:00):

Cool. I mean, that's incredibly interesting, especially the part about the, we've covered a lot this question of the athletes and the name image likeness question, which is how can young people who are working so hard for something get the ownership of the economics that come from that, which previously have gone basically only to their schools?

Jenny Johnson (26:23):

Yeah, no, so that's exactly right. And because you can fractionalize it, you actually, I mean, look, one of the most important things anybody in the asset management business can do is to get young people to save early and they don't think about retirement. But if you save $5,000 a year for 10 years, age 25 to 35 and just get a 7% return a year, you'll have more money than the person who starts to save at 35 and saves for 30 years until they're 65. So just think about that importance. And yet today the question is how do you engage and get those younger people to be excited about it? And I actually think blockchain's going to start to connect them in ways where the things they're interested about, they can actually make investments and we will all benefit if people will start earlier making those savings because then society is less responsible on the backend for having to support people.

Chana Schoenberger (27:17):

Definitely anything that encourages financial literacy in kids, American kids tend to be generally enumerate and they don't care, which is a bummer. Last question. We don't have that much time. Tell me about what you think is going to happen over the next year. Challenges, opportunities

Jenny Johnson (27:34):

Over the next year. Yeah, I think we haven't fully absorbed the interest rate increases. I think the equity markets, you have to look at it from a valuation standpoint based on the fixed income market, because what is the equity market? The equity market is a reflection of future earnings on companies today. Well, if cash now can earn you 5.5%, those future earnings just got more expensive. And so the question is how do some of these growth stocks, for example, the top five stocks, I think it's in the s and p 500, have a average PE of 49, whereas the rest of the s and p 500, it's 14.7. So I do worry about some of those growth stocks that will, you see a compression in multiples because of the cost. I also think there's some zombie companies. I was looking at statistic, a zombie company defined as operating profits as a percentage of their interest expense interest expenses increased 65% in S and P 500 companies.

(28:46)

So you're going to have some that are going to have hard time if rates don't come back down adjusting to it. So I think that could be a little bit of risk. And I do think that one of the stories that isn't fully yet explored is this issue. So there was a lot of discussion last week about the 10 year hitting 4.6% and staying there, and people were like, huh, that's odd, because we thought that it was going to be rates up, rates back down, but the deficit went from $9.1 trillion. So the debt, the US debt went from 9.1 trillion in, I think it's 2007, 35% of GDP. It's now a hundred percent of GDP, and it's up to 31 and a half trillion dollars. Okay. 25 trillion of that has to be funded by either other governments. Largest one is Japan. Japan invests here. Their insurance companies, others, that's $1.1 trillion.

(29:43)

China is number two at about 950 billion. The Fed owns 25%, and then it's mutual funds, insurance companies, US corporates, we've got to fund the US government. This year's deficit has gone from last year at a trillion dollars to $2 trillion, which means it gets added to the debt. So we have to have enough buyers of US debt. Now the good news is, man, there's no place safer than the United States. And so people feel really good about putting money in the United States, but you still have to have enough buyers to cover that. And I do worry this is a longer term story, but it could end up making it more difficult for us to reduce rates if we're going to have to attract more and more buyers to US treasuries. That is a total depressing note to end on. That was depressing.

Jenny Johnson (30:35):

But innovation, we're still the greatest country from innovation standpoint.

Chana Schoenberger (30:38):

Tell us one exciting thing to end on a high note.

Jenny Johnson (30:41):

Well, I actually, I'm totally fired up on, I'm one of those people. In 1899, the head of the US Patent Office said We should shut down because everything that's been invented has already been invented. And every time you have new technological advances, everybody talks about the death of the worker, and there'll be no jobs. And yet we always find cool jobs. We're so innovative. 300,000 Google employees, we didn't even know we needed that concept before the iPhone. Think of the number of companies on that. So I am a genuine optimist about human ingenuity to be able to actually harness these breakthroughs in technology and talk about from a medicine on Sloan Kettering's board and Thermo Fisher, the type of breakthroughs in personalized medicine. 20 years from now, we're going to be looking at what's happening today. Like we were doing medicine with a blunt instrument, so hugely optimistic about what technology's going to bring in these spaces.

Chana Schoenberger (31:40):

Okay, I'll take that one. Thank you so much. We appreciate you coming.