How to Manage $1.6 Trillion Amid Credit Risk and AI Change | Leaders with Francine Lacqua

Key Concepts

Franklin Templeton: A global investment firm founded in 1947, managing approximately $1.6 trillion in assets.
Jenny Johnson: Current CEO of Franklin Templeton, third-generation leader, and granddaughter of the founder.
Private Markets: Investments in assets not traded on public exchanges, such as private equity and private credit. These are characterized by illiquidity and potentially higher returns.
Democratizing Private Markets: The effort to make private market investments accessible to a wider range of investors, including retail customers.
Artificial Intelligence (AI): Technology that can automate tasks, analyze data, and potentially disrupt various industries, including financial services.
Blockchain: A decentralized, digital ledger system that provides transparency and tamper resistance for tracking transactions and ownership.
Succession Planning: The process of identifying and developing future leaders within an organization.

Family Legacy and Leadership at Franklin Templeton

Jenny Johnson describes her family as a group of "achievers." Her father significantly grew Franklin Templeton from a small firm with $2.5 million in assets and $10,000 in revenue to its current scale. Founded in 1947 and named in honor of Benjamin Franklin, the firm aimed to provide everyday investors with access to professional money management. Franklin Templeton operates globally with over 80 financial centers and currently manages around $1.6 trillion in assets, surpassing the trillion-dollar mark under Jenny Johnson's leadership.

Despite her family's deep involvement, there was no explicit pressure for her or her siblings to join the business. Her mother, a Stanford Medical School graduate, pursued a medical career while raising seven children, emphasizing structured family dinners with conversations often focused on science rather than finance.

The CEO Selection Process

Johnson's ascent to CEO was not a predetermined outcome. The board subjected her to a rigorous selection process, including a CEO survey and a scenario-based interview. She recalls a particularly challenging scenario involving a parking garage where clients complained about slow exits, and consultants deemed speeding up the process or adding exits impossible. Her initial fear led to a blank mind, but she eventually proposed a solution involving a quick study of the market, analysis of the problem, and tiered pricing for faster exits. The final decision rested with the board, which has a fiduciary duty to all shareholders.

Early Leadership Challenges

Johnson's first week as CEO was marked by significant events. Five days into her tenure, Franklin Templeton announced the acquisition of Legg Mason. Two weeks later, the company entered a two-week lockdown to "flatten the curve" for COVID-19, which ultimately extended into a two-year lockdown. During a tough work situation, her father sent her a cartoon of a frog being swallowed by a duck, with the frog's arm squeezing the duck's neck, symbolizing "never give up."

Both her parents are significant influences. Her father, now 92, continues to engage with the business by circling footnotes and sending her notes, demonstrating a breadth of understanding gained from having held every job in the company.

Franklin Templeton Today: Evolution and Expansion

Franklin Templeton has evolved significantly, now managing $1.6 trillion in assets. While maintaining its long-standing global presence with clients in 160 countries, the firm has diversified beyond traditional asset management. It now has a balanced portfolio of institutional and wealth management clients and is a top 10 alternatives manager, offering services in secondary private equity, real estate, private credit, and venture capital.

An asset manager is a firm that manages money on behalf of others, aiming to grow and protect wealth by investing in various assets like stocks, bonds, real estate, and private equity. These assets belong to individuals, corporations, pension funds, and governments.

Under Johnson's leadership, Franklin Templeton has invested in new products, including blockchain technology and alternative investments like private markets.

The Rise of Private Markets

Private markets are a growing segment of the economy where investments occur outside public exchanges. Unlike public markets (e.g., NYSE), where information is readily available, private market investments are made "behind closed doors," offering less transparency but potentially higher returns. These markets are primarily for institutional investors and high-net-worth individuals, requiring investors to conduct their own research and potentially tie up their capital for extended periods.

Private credit, which saw significant growth after banks tightened lending post-2008 financial crisis, is a key component of private markets. The global private markets sector, encompassing private equity and private credit, is projected to grow from $13 trillion in 2024 to over $20 trillion by 2030. However, these markets are less regulated and transparent.

Franklin Templeton, along with other players, aims to lower the barrier to entry for private markets, expanding access to retail customers. The rationale is that private markets are significant wealth-generating areas, and democratizing access could help reduce wealth disparities. This expansion is also driven by an "assets under management race" among private market players, where larger firms are increasingly dominating the market.

Vision for Wealth Creation

Johnson's vision for wealth creation centers on two key areas:

Growth in Private Markets: She sees this as a secular change, with private credit managers taking on a larger role in lending as banks may not return to previous levels of activity. Franklin Templeton offers both traditional fixed income and private credit to its clients.
Access and Customization for Individuals: She believes the financial industry has perpetuated a narrative that doesn't adequately address people's most important life goals, which often have a financial component. The firm has a duty to offer products with appropriate risk levels for individuals' risk profiles. She draws a parallel to her grandfather's founding of Franklin Templeton, which provided access to equity markets for the average person through mutual funds, offering diversification and expert experience for small investments.

Democratizing Access and Risk Management

Johnson argues that the financial industry has a duty to help people achieve their life goals, which often involve financial planning. She emphasizes the importance of providing access to investment opportunities for everyone, echoing the historical precedent of mutual funds making equity markets accessible.

The current challenge mirrors the past: with fewer public companies than two decades ago, providing access to significant asset classes like private markets, which are illiquid, requires creative vehicles.

Regarding the perceived recklessness of some private market investments, Johnson states that "any credit can be very risky or not." She uses Silicon Valley Bank's situation as an example, where even U.S. Treasuries were considered risky due to duration. The key is to align risk with client needs. When democratizing access to private markets, cognizance of risk is paramount. She advocates for the financial advisor as the primary point of contact for clients making these decisions.

Mergers, Acquisitions, and Culture

Franklin Templeton has completed 10 acquisitions since Johnson became CEO. When evaluating potential acquisitions, she prioritizes:

Clients First: "Take care of the client, the business takes care of itself," a principle her father often espouses.
Collaboration: Assessing whether employees demonstrate a collaborative spirit, openness, and willingness to participate, as a lack of this can derail acquisitions.

She emphasizes that in the asset management business, "you are buying people and investment process," and value is destroyed by imposing drastic changes. Instead, the focus is on demonstrating the benefits of being part of a larger firm, such as access to Franklin Templeton's global distribution network (clients in 160 countries) and leveraging technologies like AI.

The Impact of AI on Asset Management

AI is seen as a significant factor for asset managers going forward. Boutique managers may struggle to compete with the data analysis capabilities of larger firms that invest heavily in data acquisition. Johnson believes that while many firms might leverage common AI platforms like OpenAI, the differentiator will be training the model on proprietary data. She highlights the importance of "fencing off your own data" when building AI capabilities. The future, she suggests, lies in AI being leveraged as a tool by the entire talent force.

Blockchain and Digital Assets

Johnson is optimistic about blockchain's potential to deliver investment expertise more cost-effectively. At its core, blockchain is a decentralized digital ledger shared across multiple computers, creating a transparent and tamper-resistant system for tracking transactions.

She predicts that digital assets will eventually converge with traditional assets, much like the internet was once a separate category but is now integrated into all aspects of business.

Politics and Business Interplay

Johnson acknowledges the increasing closeness between business and politics globally. However, she maintains that businesses must operate regardless of political shifts. Most businesses aim to remain neutral to avoid alienating either political party, engaging in lobbying for specific interests. As CEO, she strives to stay "middle of the road" due to having shareholders and clients on both sides.

In situations where political administrations force choices, particularly on trade, she views volatility as beneficial for active managers. She notes that during periods of uncertainty, people recognize that managing their money is not a part-time job.

Succession Planning and Advice

Regarding succession, Johnson states that while her family has a presence in the business (one of her five children and two nephews are involved), Franklin Templeton is a public company, and there is no inherent right for any Johnson to hold a leadership position. She emphasizes that any family member considered for leadership must genuinely "love this business." She believes that a CEO's primary job is succession planning, and failing to groom the right successor is a failure. While she plans to remain in her role for a considerable time, she is actively focused on identifying and preparing the next leader.

Her advice for future leaders includes:

Surrounding yourself with the right people and placing them in the right roles.
Loving what you do: If one doesn't wake up every day loving their work, it's not the right job due to the significant time commitment.
Demonstrating resilience and persistence.

Conclusion

The discussion highlights the dynamic and disruptive nature of the current global landscape, impacting politics, trade, blockchain, and AI. Jenny Johnson, leading Franklin Templeton, navigates these changes by emphasizing innovation, particularly in private markets and through the strategic adoption of AI. Her leadership is grounded in a strong family legacy, a commitment to client-centricity, and a forward-looking approach to wealth creation and technological integration. The conversation underscores the evolving role of asset management in providing access, managing risk, and adapting to a rapidly changing world, while also stressing the enduring importance of human judgment and ethical considerations in leadership and investment.