Franklin Resources Profit Falls on Market Volatility -- Update
February 03 2016 - 3:45PM
Dow Jones News
By Sarah Krouse and Joshua Jamerson
Franklin Resources Inc. said its quarterly profit fell 21% as
assets under management declined for the third straight quarter,
the latest stumble for U.S. money managers.
The San Mateo, Calif., investment firm said assets under
management declined 13% from a year ago to $763.9 billion. The firm
pointed to weaker markets and $20.6 billion in net new outflows as
reasons for the decline.
Asset managers that specialize in active investing are
struggling as investors migrate to larger firms that offer low-cost
funds tracking market indexes. Waddell & Reed Financial Inc. on
Tuesday announced a 22% decline in fourth-quarter earnings and the
retirement of a marquee fund manager. Its shares dropped 14%
Tuesday and were down another 4.5% Wednesday afternoon.
Asset managers tend to rise and fall more severely than the
broader market and are among the financial stocks that have been
hardest hit by a selloff so far this year. Shares in publicly
traded asset managers tracked by fund-research firm Morningstar
Inc. are down 13.69% year to date through Tuesday, compared with a
6.78% decline in the S&P 500.
Barclays PLC analyst Kenneth Hill said industry pressure to
reduce fees and the sector's tendency to be disproportionately
impacted by market swings are partly to blame for declines. "It's
just a lack of conviction" in the broader market that continues to
drag money managers stocks down, he said.
Franklin Chairman and Chief Executive Greg Johnson said in a
statement Wednesday that the company has a "long history of
weathering periods like this," and anticipates the firm will
benefit from long-term global market trends.
Outflows at the company, which owns the Franklin Templeton
banner, had improved "somewhat" from the prior quarter, Mr. Johnson
added in a prerecorded webcast, but that the firm faced "continued
headwinds" from retail outflows in its flagship funds in the U.S.
and overseas.
The Franklin Income Fund, one of the oldest mutual funds in
America, had $76.4 billion in assets at the end of 2015, down from
$92.5 billion at the end of 2014, according to Morningstar.
Investors pulled a net $8.1 billion from the fund last year and it
is down 12.2% over the last 12 months, the research firm said.
The firm's flagship Templeton Global Bond Fund ended 2015 with
$54.7 billion in assets, according to Morningstar, down from $69.1
billion at the end of 2014. Investors pulled a net $11.1 billion
from the fund in 2015 and it was down 6% over the last 12
months.
Franklin has tried to control costs amid outflows and diversify
its fund lineup while defending its flagship funds, executives
said. Steps it has taken include a reduction in staff.
Executives at the firm fielded a number of questions from
analysts Wednesday morning about efforts to stem flows and mix up
its revenue streams. In recent months, the firm rolled out two
marketing papers in a bid to assuage investors. One is called "Five
Reasons Why Investors Buy and Hold Franklin Income Fund" and
another says the Templeton Global Bond Fund represents "a once in a
decade opportunity."
Franklin, like many of its peers, is also wrestling with growing
investor preferences for lower-cost exchange-traded funds, which
have eaten into demand for actively managed mutual funds. The firm
operates one fixed-income ETF, but the majority of its business is
in mutual funds.
Mr. Johnson said the firm filed for a range of "strategic beta"
ETFs early in January and said the products would "compliment"
existing active strategies.
Franklin isn't alone in trying to expand into ETFs. Legg Mason
Inc., another latecomer to ETFs, launched its first such products
late last year with affiliate QS Investors.
Traditional money managers have looked to passive products and
so-called liquid-alternative funds that package hedge-fund-like
strategies into mutual funds as ways to diversify their revenue
streams and gather assets.
For its fiscal first quarter, Franklin reported a profit of
$447.8 million, or 74 cents a share, down from $566.4 million, or
91 cents a share, a year earlier.
Operating revenue slid 15% to $1.76 billion. Analysts predicted
earnings of 75 cents a share on $1.78 billion in revenue, according
to Thomson Reuters.
Revenue from investment-management fees, the largest
contribution to Franklin's top line, fell 14% to $1.19 billion. A
14% decline in operating expenses helped counter the effect of
lower fees.
The company also bought back 10.5 million shares during the
quarter for $404.1 million.
Franklin shares, which were trading .9% higher at $32.55
Wednesday afternoon, have slid about 40% in the past 12 months.
Write to Sarah Krouse at sarah.krouse@wsj.com and Joshua
Jamerson at joshua.jamerson@wsj.com
(END) Dow Jones Newswires
February 03, 2016 15:30 ET (20:30 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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