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With assets of $1.5 trillion, Franklin TempletonThe firm is growing and ranks among America’s 10 top asset managers. The firm acquired Legg Mason asset manager, O’Shaughnessy Asset Management custom index provider O’Shaughnessy Asset Management and Lexington Partners secondary private equity investor, among other things, over the past few years. Jenny Johnson, President and CEO of the company says that it does not end here. Focused on bolt-on technology acquisitions, and other options to fill in product gaps within Franklin Templeton’s company. 

Johnson spoke with CNBC’s Johnson Delivering Alpha newsletterIn an exclusive interview, she discussed her firm’s active management strategy as well as the benefits of implementing Blockchain technology. 

 This video was edited to be more concise and clear. You can see the entire video above.

Leslie Picker: I want to kick things off on the macro front, because there are a lot of questions out there. What are your current trends in the vast and diverse portfolio, given this point of convergence for inflation, monetary policy, factor-based investing, volatility?

Jenny Johnson It’s no question, it’s a difficult time. Active management is a good idea in volatile times. And we’re really an active management – 1.5 trillion – really an active management. These are the times when you really find value. The problem is that there are so many signals. There are obvious inflation headwinds. We’re seeing a few more Fed increases in the future. The Fed raised 50 basis points, which was its highest level for 20 years. Today, they said that it was likely. [looking at]Two more increases or even three are possible, then a pause. This is the result of the huge rise in rates that you saw with the conflict in Ukraine. At the Milken conference, the frightening part was sort of hearing that almost every scenario would result in a freeze war. That means there will be a significant impact on energy costs for a very long time. The impact on food supplies will be another obstacle. We also have China’s control and zero COVID, which will impact the supply chain. These are the big headwinds. 

The tailwinds are then [the]Consumers are still flush and probably flusher than before COVID. This is a positive thing. You’ve got the big tailwinds of the demographics in Asia, you have technological innovation. It’s much easier to just go with the current. Look for areas of opportunity. For example, nearshoring the supply chain is a good way to identify where opportunities exist. The technological innovations, in my opinion, around genomics are really remarkable. Precision farming is something I see as people trying to have more control of their food supply chains. These aren’t going to be possible in the short term. While it will require some investments, I believe you should be able to see the potential. Web 3.0 represents another great opportunity.

Picker: I’m curious what you’re seeing with regard to flows right now, given all of those confounding factors affecting investing right now. Is there a greater demand for active products than passive? People want to just ride the current, get a lower price and then return to the market in two years.

Johnson: I believe flows are falling across all sectors. What we have seen lately is more active performance. You can see the shift towards it. I mean, the NASDAQ is down more than twice as much as the Dow, so, sort of your value growth switch…but I think across the board, people are nervous. People are avoiding fixed income. People take out bank loans at floating rates and short terms because they are aware that interest rates will rise. This is a very difficult period for fixed income. As long as they are able to stay flexible, that’s a good thing. Now is the time to use credit. Good cash flow is a sign of a company with a strong balance sheet. The reason I don’t think the Dow will fall as fast is because value stocks tend to have higher returns.

Picker: Franklin was also very acquisitive. Recently, Franklin bought Legg Mason. Legg Mason is a major asset manager and recently purchased another quant fund. Is it better to make deals in current circumstances than build out specific capacities? Do you have plans to make more acquisitions?

Johnson: Our acquisition strategy has been clear. We are looking for products that fit in specific product niches. Our current focus is on alternatives markets. The alternative markets will account for 15% to 16% of assets over the next few years. Yet, 46% of revenue is expected. This is a very important market. Today, our assets total $210 billion and we rank among the top 10 alternatives managers. Global products are the problem. It’s difficult to sell products in Europe if you’re a manager of real estate that is only focused on the U.S. If there are product gaps, we will fill them in. Already, we’re very clear about our desire to expand fiduciary trust and wealth. So, we will be able to make the most of bolt-on acquisitions. Fintech is disrupting our business. We make investments in new technology products, and sometimes we just invest. O’Shaughnessy Asset Management’s Canvas product is very tax efficient and direct indexing. There is a lot to be done. So, that’s why we made this acquisition.

Picker: I want to home in on what you’re doing in the alternative space right now because much of Franklin Templeton’s, 75 or so year history has been in the mutual fund space, serving the retail investor. Now you’re able to access over $200 billion worth of alternatives. This is a broad effort to enter the retail market, but it hasn’t yet done so in a significant way. Are you seeing that as the future for your business? Are you looking for alternatives to this as you grow that area of your business?

Johnson:  I say that my grandfather got in the business of mutual funds because the average person couldn’t participate in the equity markets. This is in the early 20s. They couldn’t take part in equity markets so they came up with the idea of pooling their money to allow them to invest. We now have five times as many private equity-backed firms and half the public equities we had back in 2000. That’s a difference of about 1700 to 8500, while the public equity has gone approximately 6,500% to 3.300,000. In order to make an investor universe more investable, you need to have the ability to access other options. This trend is not changing. And then I – if you actually look at it, companies are waiting much longer to go public, which means much of that growth opportunity in those early years is only captured in the private markets. 

Our Franklin growth equity team saw deals, and was watching companies wait so long to go public. They were able to allocate as much as 15% to mutual funds in liquid assets. The team started investing in late-stage venture, and finally decided that since they were located right in Silicon Valley, it was a good idea to start our own venture funds. So, we’re in this space, because we think – and by the way, credit is the same. As banks have become more regulated around their capital, which is linked to their loan portfolio, you don’t see them lending as much. This is why you are seeing a significant increase in both commercial and corporate loans. However, this also applies to direct lending consumer loans. So, you have to be able – we have to think of ourselves as finding all investment opportunities and bringing those responsibly to our clients. The fact is, alternative products have a great – they’re very illiquid, so you have to responsibly figure out how you’re going to deliver those to the alternatives channel.

Picker: A recent interview with you stated that, if 20 years old, and you had the chance to create a business from scratch, it would be possible to leverage blockchain technology. It was something I found fascinating and I wanted to know why. Given that you have already reached the top of one the largest asset managers in the world, I am curious how blockchain functions within traditional asset management. 

Johnson: Bitcoin is, in my opinion, the greatest distraction to the greatest disruption to financial services. Because it’s – so many of the conversations go down [is this]Bitcoin and currency, will it be accepted? And that’s – there’s great discussion to be had there but actually, the much more interesting [question]What can the technology do for us? Blockchain is creating trust, that’s what you should think. When you look at financial services, transactions between individuals are transactions that need intermediaries to verify trust. For example, title companies that claim ownership. Blockchain is able to eliminate many intermediaries. It can bring buyers and seller together and lower the transaction cost. Once you are able to reduce the transaction cost, fractionalizing assets can be done at a higher level. Imagine, for instance, taking the Empire State Building and selling it to one million people. Everyone has a token. If I wish to sell it to Leslie, then I do not have to travel to the title firm. All of this is built into the smart contract. It’s my belief that blockchain will release a lot more of the type of locked up liquidity in different asset types. 

Secondly, I think that this kind of ownership – there are people who are using it – once you have the token, you actually can create a loyalty program. You can already see how sports teams are selling pieces of their team. It’s actually creating loyalty. It’s possible to have coaches’ meetings. In the NFT marketplace, artists can leverage the token one. This validates that the work of art is authentic and original. But, only token holders have the right to have the individual meetings. It’s an intriguing way to do things. It not only reduces costs, but also allows for a deeper social connection.