Franklin Shares Top Rivals as Investors Put Stock in World Bonds
Franklin Resources Inc. (BEN) is beating every money manager in the Standard & Poor’s 500 Index this year. The reason may be investor disdain for equities in the U.S., one of the world’s few stock markets showing a gain.
Franklin rose 14 percent through July 29, while S&P’s 11- member index of large asset managers and custody banks fell 10 percent. Shareholders are paying almost three times as much for every dollar Franklin manages as they shell out for BlackRock Inc. (BLK)’s $3.7 trillion in assets, and more than four times as much as they’re willing to pay for Legg Mason Inc. (LM)
The firm, which has built itself from a family business into a global fund manager with 89 percent of assets outside domestic equities, is benefiting as investors put more money into international stocks and bonds. Michael Hasenstab, Morningstar’s 2010 fixed-income manager of the year, attracted $10.9 billion through June into his Templeton Global Bond Fund, the most of any U.S. mutual fund, according to Morningstar Inc. (MORN)
“The big shift in the last few years,” Chief Executive Officer Gregory Johnson said in an interview, “is people want to diversify and maintain purchasing power. That’s really where global bonds have been such a perfect fit.”
Franklin, based in San Mateo, California, with offices in more than 30 countries, saw assets grow 29 percent in 12 months. The firm, the fifth-largest U.S. mutual-fund company, had $734.2 billion under management at midyear, including $83.6 billion in domestic equities.
Industrywide, 43 percent of the money overseen by stock and bond managers is in U.S. equities, according to Morningstar, the Chicago-based research firm.
‘The Most Global’
“Franklin is the most global asset manager,” Jonathan Casteleyn, an analyst at Susquehanna Financial Group, said in a telephone interview. “They have the ability to search out and find the bull market.”
The company may report a 35 percent increase in fiscal third-quarter profit to $485 million tomorrow, according to the average estimate of 11 analysts surveyed by Bloomberg.
Mutual funds that focus on U.S. equities lost an estimated $8 billion to redemptions this year through June 29, according to data from the Investment Company Institute in Washington. Clients poured about $104 billion into Franklin’s bond funds in the two years ended March 31, while pulling $2.9 billion from the firm’s stock funds.
Franklin’s stock has more than tripled since the S&P 500 fell to a 12-year low on March 9, 2009. S&P’s asset-manager index has almost doubled.
Stockholders are willing to pay for Franklin’s breadth. The firm’s premium to assets under management, used to calculate the market value for fund companies relative to their managed assets, rose to 3.1 percent as of March 31, according to data compiled by Bloomberg.
The ratio was 1.2 percent for BlackRock, which became the world’s biggest money manager with the $15.2 billion acquisition of Barclays Global Investors in December 2009. Baltimore-based Legg Mason had a ratio of 0.7 percent. The number is calculated by subtracting tangible common equity from the company’s market value and dividing by assets under management.
Franklin sticks to a long-term outlook and favors countries with low debt.
World bonds accounted for 43 percent of long-term sales and $56.5 billion in net new deposits in 2010. Many of its funds, including those run by Hasenstab and Mark Mobius, executive chairman of Templeton’s emerging-markets group, have invested heavily in Asia.
“If we get into an environment where there’s massive credit risk, either rates rising or if they get some of their investments wrong, we could see some outflows,” Casteleyn said. “The hypergrowth will come out.”
Johnson, 50, is the grandson of Rupert H. Johnson, who founded the firm in New York in 1947, a year after Edward C. Johnson Jr. started Fidelity Investments in Boston. The two aren’t related. Rupert’s son Charles B. Johnson, 78, took over as CEO in 1957 and is now chairman. Charles’s brother, Rupert Johnson Jr., 70, joined in 1965 and is vice chairman.
The three Johnsons, Gregory Johnson’s sister Jennifer M. Johnson, who is the chief operating officer, and Peter M. Sacerdote, a brother-in-law of Charles Johnson and Rupert Johnson Jr., own about 34 percent of the company’s stock worth $9.46 billion, Bloomberg data show. The shares have soared more than 4,000 times in value since Franklin’s initial public offering in 1971, based on the split-adjusted price.
The average reported compensation for executives at Franklin is $3.58 million, compared with $7.12 million at peer companies, according to Bloomberg data.
“They tend to not make many mistakes,” Casteleyn said of the Johnsons. “They say they pay back 60 to 80 percent of their net income either in the form of dividends or share buybacks. It’s a cash cow.”
Acquisitions helped fuel Franklin’s growth. The firm bought California investment boutique Winfield & Co. in 1973 and moved to San Mateo. Franklin acquired Templeton, Galbraith & Hansberger Ltd., headed by Sir John Templeton, the fund pioneer known for international investing, in 1992, and still operates overseas under the Templeton name. The company purchased the adviser to Michael Price’s Mutual Series Fund Inc. in 1996 to broaden its domestic stock lineup.
“Templeton has been a huge machine for Franklin in terms of gathering assets,” Bobroff said. “Franklin has tended to leave the people, at least from a money-management standpoint, somewhat autonomous.”
‘Why Limit Yourself?’
A version of the Templeton Global Bond Fund based in Luxembourg attracted $5.89 billion this year through May, the most among long-term funds outside the U.S., according to New York-based researcher Strategic Insight. The Templeton Global Total Return Fund, also managed by Hasenstab, added the second- most deposits, $5.7 billion.
Franklin’s global-bond assets grew to $185 billion as of June 30 from $50 billion in June 2009.
“The investor has gotten more comfortable with the risks around global equities and these markets with currency and trade strengths,” Johnson said. “Still, the average investor in the U.S. is over 50 percent in domestic U.S. equities, and I would argue why limit yourself? The U.S. economy, as we all know, is becoming less and less a factor.”
Disenchantment with managers who pick U.S. stocks predates the 2008 market decline. Actively run domestic-equity mutual funds are headed for a record five straight years of withdrawals, data from the Investment Company Institute show. In the 10 years through May 31, customers withdrew about $51 billion more from U.S. equity funds than they deposited as long- term returns stagnated.
Janus Capital Group Inc. (JNS), based in Denver, has had eight straight quarters of net withdrawals totaling $21.6 billion. American Funds, the family run by Los Angeles-based Capital Group Cos., saw its $157 billion flagship Growth Fund of America lose $9.5 billion in redemptions this year through June, the most of any fund, according to Morningstar.
Hasenstab, 38, who has run the $61.5 billion Global Bond fund since January 2001, held no U.S. Treasuries and less than 1 percent of assets in euro-area sovereign bonds as of March 31, favoring countries with lower debt. He held no Japanese government bonds, opting for less-leveraged Asian economies.
The fund, up 6.1 percent this year through July 29, beat 99 percent of its world-bond peers over the past five years, according to Morningstar.
Relying on a prominent manager such as Hasenstab is one risk to Franklin because he could leave or step down, Jason Weyeneth, an analyst with Sterne, Agee & Leach Inc., said in an e-mail response to questions. Hasenstab oversees about $155 billion, or 21 percent of Franklin’s assets.
“It’s a good problem to have,” said Weyeneth, who rates the stock “buy.”
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