Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has negatively affected Franklin Resources’ assets under management, it is cautiously optimistic about the firm over the near to medium term. Franklin came into fiscal 2022 (ending September) with $1.530 trillion in AUM, which rose to a record $1.578 trillion at the end of December 2021, but market losses of more than $150 billion and outflows of more than $35 billion since the start of calendar 2022 left the company with $1.388 trillion in managed assets at the end of August. So far, market losses have had a bigger impact on AUM than fund flows, with Franklin reporting a 9.2% (13.8%) market loss for its managed assets during its fiscal third quarter (last two fiscal quarters). The firm’s investment performance has hewed close to benchmark returns for both its equity and fixed-income operations the past couple of quarters, with the better diversification of its product portfolio since the Legg Mason acquisition (as well as the addition of several alternative asset managers to the platform the past couple of years) helping the company to hold on to more assets than its equity-heavy peers.

There’s been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale within existing product sets, as well as pursue nonaffected investment products like alternative assets, as a means of offsetting the impact of fee and margin compression being driven by the growth of low-cost passively managed products. During the past several years, Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM, while 38% is invested in fixed-income products, 10% in multi-asset/balanced funds, 16% in alternative assets, and 4% in money market funds. Although this shift in Franklin’s product mix to keep margins from deteriorating in the face of industry wide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive in the face of current market headwinds.

Financial Strengths

Franklin entered fiscal 2022 with $3.2 billion in debt on a principal basis (including debt issued/acquired as part of the Legg Mason deal): $300 million of 2.8% notes due September 2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. The firm also has a $500 million revolving credit facility that remains untapped. At the end of June 2022, Franklin had $5.8 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with the expectations, and rolls over its debt due September 2022, it will enter fiscal 2023 with a debt/total capital ratio of 22%, interest coverage of close to 20 times, and a debt/EBITDA ratio (by the calculations) of 1.5 times. Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends (including special dividends). While Franklin’s current payout ratio is slightly lower than the firm’s 40% average payout (when excluding special dividends) the past five years, it is expected that only mid-single-digit annual increases in the dividend going forward. Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. With the company potentially paying down debt over the next several years, share repurchases will likely be limited in the near term.

Bulls Say

Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth-largest global manager of cross-border funds.
The purchase of Legg Mason has lifted Franklin’s AUM closer to $1.5 trillion, hoisting it into the second-largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group, and J.P. Morgan Asset Management.
Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Description

Franklin Resources provides investment services for individual and institutional investors. At the end of July 2022, Franklin had $1.430 trillion in managed assets, composed primarily of equity (32%), fixed-income (38%), multi-asset/balanced (10%) funds, alternatives (16%) and money market funds (4%). Distribution tends to be weighted more toward retail investors (49% of AUM) investors, as opposed to institutional (49%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers been covered, with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the United States.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.