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With assets of $1.5 trillion, Franklin Templeton is one of America’s top 10 wealth managers and counting. In recent years, the company’s acquisitions have included asset manager Legg Mason, custom index provider O’Shaughnessy Asset Management, and secondary private equity investor Lexington Partners. President and CEO Jenny Johnson says it doesn’t stop there. She is focused on bolt-on technology and alternative acquisitions to fill product gaps in Franklin Templeton’s business.

Johnson sat down with CNBC’s Delivering Alpha newsletter in an exclusive interview, in which she also discussed the company’s active management strategy and made a case for implementing blockchain technology.

(The following has been edited for length and clarity. See above for the full video.)

Leslie Picker: I want to start things on the macro front because there are a lot of questions out there. With such a turning point in inflation and monetary policy, what do you see for factor investing, volatility, in your huge, diverse portfolio right now?

Jennie Johnson: There’s no question it’s a difficult time. And I would say the good news is that active management pays off in times of high volatility. And we’re really active management – 1.5 trillion – really active management. So, it’s times like this when you find value. I think the challenge is that there are a lot of mixed signals. You have the obvious headwind of inflation. The Fed’s 50 basis point hike was the highest in 20 years and we see a few more on the horizon. I think they hinted today that we probably are [looking at] two more raises, maybe even three, and then a break. So you’re going to have this big interest rate hike that you have with the war in Ukraine. I was at the Milken conference last week and what was kind of scary was the message that the best-case scenario is almost a frozen war, which means you’re going to affect energy prices for a long period of time. The food supply will be another headwind. And then of course we have China’s lockdown and zero-COVID policy affecting the supply chain. So these are your big headwinds.

And then comes the tailwind [the] Consumers are still quite flushed, probably more flushed than they were pre-COVID. It’s good. You have the big tailwind of demographics in Asia, you have technological innovations. To be honest, I tell people that it’s easier to go with the flow the way it flows. So find areas where there is opportunity, things like nearshoring the supply chain, try to see where there is opportunity there. I think the technological innovation, I think things around genomics are really impressive. I think things around precision farming as people are trying to gain more control over their food supply chain as we see it. Well, these are not short-term. It will require some investment but I think you want to go behind the possibilities. I think Web 3.0 is another big opportunity.

Picker: With all of these confounding factors affecting investing right now, I’m curious to see what you’re seeing in terms of capital flows right now. Do you see more interest in the active products, or do you see more interest in passive products where people just want to ride out the tide, pay a lower fee, and then maybe get back into the market in a few years or so? see how it’s done?

Johnson: I think the rivers have gone down across the board. I think what we saw is active outperformance. Part of it is that you’re just looking at the transition to it. I mean the NASDAQ is down more than twice as much as the Dow so kind of a value growth switch… but I think people are nervous across the board. And so you see people holding back on the fixed income side. You see people taking out short-term, variable-rate bank loans because they know rates are going to go up, and this is obviously a really tough time for fixed income. So keep flexibility as much as you can. Credit is really important now. Companies with good balance sheets and good cash flow. Again, I don’t think you’re seeing the Dow fall as much because these tend to be value stocks.

Picker: Franklin has also been quite greedy, recently buying a quant fund from Legg Mason, a large money manager that was buying other alternative money managers. How do you feel about closing deals in the current environment versus building specific capacity? And are you planning further acquisitions in the future?

Johnson: We’ve been very clear about our acquisition strategy, which is to really find products that fill specific product niches that we needed to have. Now we are very focused on the alternative markets. They project that about 15% or 16% of assets in the wealth management business over the next few years will come from alternatives, but still 46% of revenue. So it’s an important place for us, and today we’ve got $210 billion, we’re one of the top 10 alternative managers. But the challenge is that you need global products. For example, if you have a real estate manager that only focuses on the US, it will be difficult to sell it in Europe. So if there are product gaps, we will fill them. We have already made it very clear that we want to further expand our trust business. And since we have complementary acquisitions, that will make sense there. And finally, fintech is very disruptive to our business and that’s why we make investments, sometimes just investments, sometimes acquisitions, in technology products. O’Shaughnessy Asset Management has a product called Canvas that is really tax efficient direct indexing. We think there is a lot of growth there. And so we really made this acquisition for this technology platform.

Picker: I want to talk briefly about what you’re doing in the alternative space right now, because much of Franklin Templeton’s 75-something year history has been in the mutual fund space and serving the individual investor. And now you have over $200 billion worth of alternatives that are just broadly trying to break into retail, but have not yet done so on a large scale. Do you see the future in this? Is that something you want to achieve with alternatives while trying to grow this part of your business?

Johnson: I’m saying that my grandfather got into the mutual fund business because the average person couldn’t participate in the stock markets. You speak in your 20s. And they couldn’t participate in the stock markets, so people came up with the idea of ​​pooling money and allowing them to invest. Well, today we have half as many public shares as in 2000 and there are five times as many private equity-backed companies. So that number went from about 1,700 to 8,500, and the public shares went from about 6,500 to 3,300. So, especially in an investable universe, having access to alternatives is really, really important, and I don’t think that trend is changing. And then I — if you look closely, companies are waiting a lot longer to go public, which means a lot of those growth opportunities in those early years are only being captured in the private markets.

We actually got into the venture capital business because our Franklin growth stocks team reviewed deals and watched companies wait so much longer to go public that they can invest up to 15% of a mutual fund in illiquid assets. So they started looking at late stage ventures and then they ended up saying, well, actually we’re based in the heart of Silicon Valley, we should actually start our own venture funds. So we’re in this space because we think — and by the way, credit is the same. They don’t view bank lending in the same way as there are increasing regulations on the capital tied up in their loan portfolio. So you’re seeing this large proliferation, not just of commercial and corporate lending that’s being originated in the retail lending markets, but you’re actually seeing consumer lending with direct lending. So you have to be able – we have to think of ourselves, that we find all the investment opportunities and bring them responsibly to our clients. The fact is that alternative products have one great advantage – they are very illiquid, so you need to responsibly figure out how to deliver them to the alternative channel.

Picker: In a recent interview, you said that if you were 20 years old and could start fresh at any company, you would build something that leverages the blockchain ecosystem. I found that fascinating and I just want to ask you why. And given that you’ve already made it to the top of one of the largest wealth managers in the world, how do you see blockchain evolving and functioning within the traditional wealth management space.

Johnson: I like to say that Bitcoin is the biggest distraction from the biggest disruption happening to financial services and other industries. Because the fact is that a lot of the conversations get lost [is this] Currency like bitcoin, will it have a place or not? And that is – there are great discussions to be had, but they are actually all the more interesting [question] What can this technology do? And if you think about what blockchain does, it inspires trust. If you think about what financial services are, transactions between people are transactions where intermediaries have to show trust, a title company that you actually own, for example. Well, blockchain can eliminate many of these intermediaries, bringing buyers and sellers together and lowering the cost of a transaction. Once you can lower transaction costs, you can fractionate assets on a much larger level. For example, you can imagine taking the Empire State Building and selling it to a million people, each with a token. And if I want to sell to you, Leslie, I don’t have to go to the title company. It’s all built into this smart contract. So I think blockchain will unleash a lot of this type of locked-in illiquidity in different types of assets.

Second, I think that kind of ownership – there are people using it – once you have the token, you can actually create a loyalty program. So you’re already seeing sports teams where they’re, say, selling off part of the team, and what it’s really doing is creating loyalty. Imagine if you could host special trainer meetings or in the NFT market artists using the token to certify that this work of art is indeed original and authentic but also using it where only those who use the token owning this can then have these individual meetings with artists. So it’s really an interesting path. I think it dramatically reduces some of the costs in the business, but it also inspires that desire for some sort of social connection.