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Franklin Resources (BEN)Stock (Asset Management Industry, Financial Services Industry)
 Franklin Resources is also sensitive to American investors' (73% of new sales[4]) portfolio allocation decisions. With management fees accounting for 58% of Franklin's revenue,[5] international exposure directly impacts Franklin's operating revenue. A higher equity/international mix increases Franklin's management fee revenue, while a shift towards fixed-income decreases it, because Franklin charges customers higher management fees on international and equity funds than domestic and fixed income ones. From only 30% in 2006, international exposure as a percent of total Assets Under Management (AUM) has increased to 59% in June of 2008.[1]
[edit] Company Overview  Franklin manages international and domestic equity, bond, and hybrid mutual funds for over 22 million retail, institutional, and high-net worth clients.[6] Strong equity markets, acquisitions, and net fund inflows have helped the asset manager triple Assets Under Management (AUM), which is the total money Franklin invests for all its customers, since 2002.[3] Franklin profits primarily from management fees (58% of 2007 revenue[5]) and underwriting and distribution charges (37%[5]).
While underwriting and distribution charges accounted for $2.28 bln of operating revenue in 2007, it also was Franklin's largest operating expense at $2.16 bln.[5] The high cost results from Franklin's reliance on its distribution network of financial advisors.[4] Franklin offers mutual funds with 12b-1 fees, which are sales commissions directed to the advisor, in order to promote the selling of its funds to retail customers. Franklin essentially distributes the sales charge to the advisor that sold it, and profits mainly from the management fee. [edit] Subsidiary Mutual Fund CompaniesFranklin Resources acts as supportive unit to its six subsidiary investment management companies.
Franklin Resources provides corporate management, accounting and trading services, distribution, and client servicing for each of its six subsidiaries. These business segments all operate and market themselves under their respective names. If a client wants to shift exposure from Asian equity to U.S. Bonds, he can remain within Franklin's family of mutual funds. [edit] Financials OverviewAs shown in the bar graph, Franklin Resources' revenue is closely tied to its Assets Under Management (AUM). AUM is impacted by two factors - organic growth and new sales. Organic growth accounts for the larger of the two factors and in 2007 contributed to $139 bln of the increase in AUM, while net sales added $46.6 bln.[3] Organic growth occurs when Franklin's investment managers achieve overall positive capital appreciation. Net sales increase AUM if new sales exceed redemptions. High investment returns attract more new sales, but poor returns chases money away. As a result, AUM is vulnerable to bigger swings as investors chase performance. While Franklin increased its AUM from 2003-2007, the Asset Management Company's net flow of $-0.3 bln and capital depreciation of $65.4 bln has resulted in a $65.7 billion decline in AUM for the first nine months of 2008[1]. Weakness in equity prices largely contributed to this drop. Stock depreciation and investors shifting away from equities and into fixed income funds has lowered the equity portion of AUM from 60% at the end of FY 2007 to just 54% nine months later.[1] 
[edit] Market Trends and Forces[edit] Portfolio mix impacts Franklin's operating revenues.As investors shift away from foreign equity towards domestic fix income, Franklin receives less management fees. The average industry fee in 2007 was 0.63% for international equity, but only 0.37% for domestic bond funds.[13] As indicated in the table, Franklin's equity portion of AUM grew about 1% annually 2005-2007, but fell by 6% during the first nine months of FY 2008. Franklin's management fee remained constant at 0.613% for the first nine months of FY 2008, because the company raised fees overall to counter the unfavorable product mix[1]
[edit] International equity and bonds affect Franklin's AUM. As of June 30, 2008, Franklin Resources foreign investments as a percent of Assets under management (AUM) was 59%[1]. This international exposure almost triples industry peer, T. Rowe Price Group (TROW), whose AUM consist of 20% international positions[18]. This exposure will benefit Franklin more than competitors when foreign assets appreciation is higher than domestic ones, but the opposite is true if the U.S. is stronger than international markets. A strong U.S. dollar and better relative Gross Domestic Product growth compared to the world are typically bullish for U.S. positions. [edit] Performance compared to indexes and industry peers influences fund flows.With 69% of Franklin's customers being retail investors[3], relative performance is a key gauge to determining fund flows. If Franklin funds do well, investors are more likely to funnel new money into them. If they have relatively poor performance, then net flow will slow or be negative. One of the factors contributing to Franklin's more than tripling of assets since 2002, is the company's relative outperformance of funds over the long-term[19]. During early 2008, the average Franklin fund had performance in-line with peers[19], and net inflows were $25.4 bln for the first 9 months of FY 2008 compared to $55.8 bln for the same period in FY 2007[1]. The following are charts of the net returns post-fees for Franklin five largest funds, which account for 25% of Franklin total AUM[20], compared to their respective Morningstar industry category and peers. The data was obtained from Morningstar[21] and is dated as of August 8, 2008. A 92% rank in category means that the fund performed worse than 92% of the fund's peers. The fund returns also are using share class A, which carry the lowest fees, and thus, best returns.
Looking at Templeton Growth, the fund is down almost 17% over the past year and performed worse than 76% of its peers. The relative 5-yr performance is poor also. The weak fund return will hurt organic growth of AUM, but also, slow new business and chase away current investors. As of August 2008, the fund's AUM already are down $11.4 billion to $28 billion compared to ten months ago. [edit] Franklin is vulnerable to shifts in financial advisor decisions.Financials advisors sell Franklin mutual funds to their clients. In exchange, Franklin offers them a sales commission, which is called a 12b-1 fee. This expense accounted for 52% of operating expenses for FY 2007.[4] If financial advisors shift towards using Exchange Traded Funds or Closed End Funds in their clients' accounts, then Franklin's AUM will suffer. [edit] CompetitionFranklin Resources competes directly with traditional mutual fund companies like Eaton Vance (EV), T. Rowe Price Group (TROW), and Janus Capital Group (JNS). The company competes not only for customers, but also, for investment managers. A manager with a good track record of outperformance will cost more, but at the same time, outperformance leads to larger relative increases in Assets under management (AUM). Performance is a key to obtaining new investors and keeping existing ones, especially when a fund has a large retail investor class that is more likely to switch between mutual funds. Asset managers also compete for access to financial advisors, because they make investment decisions for their clients. Franklin offers share classes with a 12b-1 fee, or sales commission, to entice advisors to sell its funds. Franklin Resources also competes with close end funds and Exchange Traded Funds for assets. Companies like Barclays (BCS) offer ETFs that give investors more tax management options and lower management fees on average[23]. Between 2006 and 2007, total ETF AUM grew 44%, while mutual funds increased 15.5%.[24] The following table[2] ranks assets managers by AUM (in $millions) as of December 31, 2006.
 Franklin Resources2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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