Franklin Resources Profit Falls on Market Volatility -- Update

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 [e-mail] and Joshua Jamerson at [e-mail]

(END) Dow Jones Newswires

February 03, 2016 15:30 ET (20:30 GMT)

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