Franklin had the best risk-adjusted return in the Standard & Poor’s index of asset managers and custody banks over the past five years, according to the BLOOMBERG RISKLESS RETURN RANKING. The San Mateo, California-based firm had the highest stock gain and the third-lowest volatility in the group, as investors flocked to the firm’s top-performing bond funds and helped boost fees.
Franklin, the owner of the Franklin and Templeton mutual funds, has seen its mix of assets change from equities to fixed- income since the 2008 financial crisis as investors shift from stocks to bonds. Assets in Franklin’s global bond funds more than quadrupled in the past five years to $227 billion as low interest rates have sent clients in search of higher yields. Hasenstab, who runs more than $190 billion at Franklin, made a successful bet on emerging bonds and currencies, turning his funds into a magnet for cash.
“The world bond category was strong in general, but a lot of the money flowed to him,” Miriam Sjoblom, an analyst for Chicago-based Morningstar Inc., said in a telephone interview. “People just piled in.”
Franklin has been less successful on the equity side as investors have pulled money from its U.S. stock mutual funds in each of the past five years, Morningstar data show, even as the firm has been urging customers to move back into equities. Stock assets, which accounted for 56 percent of Franklin’s assets five years ago, now represent about 39 percent.
Franklin rose 1.7 percent, adjusted for price swings, in the five years ended April 30, according to data compiled by Bloomberg. Ameriprise Financial Inc. (AMP), the Minneapolis-based money manager that has expanded in recent years through acquisitions including Bank of America Corp.’s investment unit, ranked second with a 1.3 percent return on a risk-adjusted basis. New York-based BlackRock Inc. (BLK), the world’s largest money manager, placed third with a gain of 1.1 percent.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The ranking included 18 of the 20 companies in the Standard & Poor’s Supercomposite Asset Management & Custody Banks Index. Virtus Investment Partners Inc. (VRTS) and Financial Engines Inc. (FNGN) were not included because they haven’t been publicly traded for five years.
Janus Capital Group Inc. (JNS), the Denver-based money manager that has 82 percent of its assets in equity products, including its signature domestic growth funds, was the worst performer on an absolute and risk-adjusted basis. The shares fell 67 percent on a cumulative basis and 1 percent when adjusted for volatility over the past five years.
Legg Mason Inc., the Baltimore-based asset manager that has been seeking to reverse redemptions for the past five years, was the second-worst performer in the ranking, according to data compiled by Bloomberg.
Franklin was founded in 1947 by Rupert Johnson Sr., whose two sons still control about one-third of the stock. The company went public in 1971 at a split-adjusted share price of 2.4 cents, according to company data, which means one dollar invested at the initial public offering is worth more than $6,500. The stake held by the two Johnsons is valued at about $11 billion.
In 1992, Franklin bought Templeton, Galbraith & Hansberger Ltd., a firm run by well-known global investor Sir John Templeton, which resulted in the addition of managers including emerging-market specialist Mark Mobius. Four years later, it acquired Heine Securities Corp, adviser to Mutual Series Fund Inc., from Michael Price, a successful value investor.
The deals gave Franklin a level of diversification, including a “global distribution footprint,” that few of its rivals can match, said Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York.
At the end of 2012, Franklin reported that 35 percent of its assets came from investors outside the U.S., up from 25 percent at the end of 2007. Almost 48 percent of the firm’s sales in 2012 were made in markets other than the U.S., the company said. At BlackRock, which manages a range of assets from stocks to bonds to real estate, 39 percent of its assets came from clients based outside the Americas, while only 31 percent of revenue came from sales made outside the region, which includes the U.S., Canada and Latin America.
“Asset growth was so strong in the States, a lot of firms just focused here,” Chief Executive Officer Gregory Johnson, 51, said in a telephone interview. Johnson, the grandson of the company’s founder, said Franklin has competed in many overseas markets for decades, giving it a “first-mover” advantage over rivals. In Taiwan, Franklin has built up more than $23 billion in assets over 27 years, Johnson said.
Franklin’s net income increased 9 percent in the five years ended Dec. 31, 2012, and more than doubled from a five-year low at the end of 2009, according to data compiled by Bloomberg. The firm, which reported quarterly earnings yesterday, said profit in the three months ended March 31 rose 14 percent to $572.8 million.
Investors continued to pour money into Franklin’s global bond funds in 2013, putting $15.3 billion into such products in the quarter and adding $100 million to taxable U.S. bond funds. Clients put $700 million into global stock funds, while removing $500 million from those that invest in U.S. stocks.
While Franklin’s global focus has been a plus in the past decade, it could prove to be a handicap in coming years as domestic stocks outperform non-U.S. equities, said William Smead, CEO of Smead Capital Management Inc. in Seattle where he oversees $400 million, including Franklin shares.
“In our opinion, they have drunk too much of the international Kool-Aid,” said Smead.
About 72 percent of Franklin’s $320 billion in stocks were in funds that buy non-U.S. shares as of March 31. On the fixed- income side, 61 percent of the firm’s money is in global or international assets.
Bonds outside the U.S. still have a lot of room to grow because many retail investors have limited exposure to the asset class, Jason Weyeneth, an analyst with Sterne, Agee & Leach Inc. in New York, said in a telephone interview.
“Global bonds have been the driver for Franklin,” Weyeneth said.
In recent years, investors from around the world have been depositing their money into funds run by Hasenstab. The 39-year- old money manager joined Franklin right out of college in 1995 and has been managing the Templeton Global Bond Fund (TPINX) since 2001.
He beat 92 percent of peers in 2008 by investing in currencies such as the Japanese yen, the U.S. dollar and the Swiss franc to take advantage of the flight to safety that accompanied the global financial crisis, according to an October 2008 note on the Morningstar website.
Since the crisis, Hasenstab has favored bonds and currencies from countries with strong economic fundamentals and good fiscal management.
“We remain encouraged about the growth prospects and low- indebtedness of many emerging markets,” he wrote in a March 18 commentary. South Korean government bonds represented 11 percent of Templeton Global Bond’s holdings as of Nov. 30, the largest single position, according to a regulatory filing.
Templeton Global Bond gained 9.3 percent a year for the past five years, better than 92 percent of peers, data compiled by Bloomberg show.
Investors have taken notice. Over the past five years, the fund’s assets have grown almost sevenfold to $71 billion, according to data compiled by Bloomberg. A version of the fund sold in Europe has grown more than fourfold to $47 billion.
When Hasenstab stumbled in 2011, trailing 91 percent of rivals after a selloff in emerging-market currencies, deposits into his fund dropped 84 percent the next year, Morningstar data show. They bounced back in the first three months of 2013 after Templeton Global Bond topped 90 percent of peers in 2012.
Franklin is seeking to urge clients back into equity funds, starting a campaign in 2010 called “2020 Vision,” which tells investors that that equities in this decade will probably deliver better returns than they did in the period from 2000 to 2010.
The campaign has yet to bear fruit among U.S. investors, who continue to avoid the company’s equity funds, even as those funds outperformed 57 percent of rivals in the past five years, according to Denver-based Lipper.
“It has actually been easier to sell our equity funds outside the U.S. because of the strength of our brand,” Johnson said.
The $18.5 billion Templeton Asian Growth Fund, which is based in Luxembourg and managed by Mobius, attracted $5.8 billion in deposits over the past four years, according to Morningstar data.
Franklin in September agreed to pay about $183 million for a majority stake in K2 Advisors Holdings LLC, to increase its presence in alternative investing. Stamford, Connecticut-based K2 is a fund-of-fund hedge manager with $9.3 billion in assets.
Johnson said while he is concerned about his firm’s reliance on deposits into global bond funds over the past few years, he is confident the company has enough choices to offer investors should sentiment change.
“We don’t have many holes in our lineup,” he said.
To contact the editor responsible for this story: Christian Baumgaertel at firstname.lastname@example.org