Franklin’s Profit Stagnates on Lower Stock-Fund Assets

Franklin Resources Inc. (BEN), manager of the Franklin and Templeton mutual funds, said first-quarter earnings stagnated as declining stock-fund assets hurt fees.

Net income for the three months ended March 31 was unchanged at $503 million, or $2.32 a share, from $503 million or $2.25 a year earlier, the San Mateo, California-based company said today in a statement.

Franklin’s equity assets fell 2.9 percent to $300 billion in the 12 months ended March 31 as bond assets climbed 15 percent to $317 billion. Chief Executive Officer Gregory Johnson, in a campaign called “2020 Vision,” has been urging investors to put more money into stock funds, arguing that in the coming years equities are likely to deliver better returns than they did in the past decade.

“We continue to see a flood of money coming into bonds which aren’t as profitable as equities for money managers,” William Smead, chief executive officer of Smead Capital Management Inc. said in a telephone interview. The Seattle-based firm, which oversees $190 million, holds Franklin shares.

Franklin fell 3.3 percent to $121.74 in New York, the most since Jan. 11. They gained 27 percent this year compared to an increase of 16 percent for the Standard & Poor’s index of asset managers and custody banks.

Franklin’s profit was helped by $82.4 million in investment income as the market rally drove gains on securities held on its balance sheet. Franklin was expected to earn $2.23 a share, the average estimate of nine analysts in a Bloomberg survey.

‘Lower Quality’

“The beat was lower quality -- primarily driven by higher non-operating income,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said today. Kim has a buy rating on the stock with a price target of $145 a share.

Chief Financial Officer Kenneth Lewis, in pre-recorded remarks, attributed the increase in non-operating profits, which rose 43 percent from a year earlier, to the “strong market backdrop” in the first three months of the year.

Franklin’s expenses rose 6 percent to $1.18 billion as revenues rose 3 percent to $1.8 billion. The firm’s operating margins shrank to 34.3 percent from 36 percent a year earlier.

Investors put $3.4 billion into Franklin’s fixed-income funds during the quarter, $2.2 billion into so-called hybrid funds that blend stocks and bonds, and $400 million into equities. The average fee on a stock fund is 1.4 percent compared to 1 percent for a bond fund, data from Chicago-based Morningstar show.

Like Franklin’s Johnson, BlackRock Inc. (BLK)’s Chief Executive Officer Laurence D. Fink, who leads the world’s biggest asset manager, has advised clients to put their money into equities as bond yields have shrunk to record lows.

Stock-Fund Withdrawals

Investors aren’t heeding that advice so far. In the year ended March 31, equity funds suffered withdrawals of $130 billion while bond funds attracted $191 billion, according to data from Chicago-based Morningstar Inc. (MORN)

Performance at the company’s flagship fund, the $61 billion Templeton Global Bond Fund (TPINX), bounced back this year after it trailed 91 percent of rivals in 2011, according to data compiled by Bloomberg. The fund, managed by Michael Hasenstab, gained 7.2 percent in 2012, better than 94 percent of peers. Over five years, it has topped 98 percent of competitors.

Hasenstab’s bets on emerging market currencies failed to pay off last year, a situation he blamed on “temporary panic and contagion as opposed to fundamentals problems,” in a September note posted on Franklin’s website. The fund had 48 percent of its assets in Asian currencies as of March 31, data on the website shows.

Templeton Global Bond attracted a net $15 billion in the first 10 months of 2011, the most of any U.S. mutual fund, according to Morningstar. In the last two months of the year investors withdrew $1.8 billion after performance slumped. In the first three months of this year, investors added $384 million to the fund. Hasenstab oversees about $160 billion in assets, Matthew Walsh, a Franklin spokesman, said in an e-mail.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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