Franklin Resources: A Victim Of Passive Money

seekingalpha10-23

Franklin Resources has struggled with a more than 60% stock decline over the past decade due to a shift from active to passive investment management.Despite significant acquisitions like Legg Mason ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFranklin Resources: A Victim Of Passive Money\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-23 02:17 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4728369-franklin-resources-a-victim-of-passive-money><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Franklin Resources has struggled with a more than 60% stock decline over the past decade due to a shift from active to passive investment management.Despite significant acquisitions like Legg Mason ...</p>\n\n<a href=\"https://seekingalpha.com/article/4728369-franklin-resources-a-victim-of-passive-money\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4728369-franklin-resources-a-victim-of-passive-money","article_id":"2477370859","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/171555861/image_171555861.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2477370859","pubTimestamp":1729621049,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Franklin has grown through acquisition over the past five years. However, through the lens of its share price, it has not been a success. The first meaningful deal was Baltimore investment and asset management shop Legg Mason in 2020, in which the firm acquired $797.4 billion of AUM for a cash consideration of $4.5 billion. That transaction made it the sixth-largest independent investment manager in the world. It was followed by the purchase of private equity firm Lexington Partners, whose $55 billion of assets AUM were onboarded for $1.75 billion in April 2022. Shortly thereafter, European credit and private debt manager BNY Alcentra Group and its $35 billion of AUM were acquired from Bank of New York Mellon for an upfront cash consideration of $594.1 million  in November 2022. The most recent sizeable transaction occurred at the onset of 2024 with the purchase of Putnam Investments, in which Franklin paid Great-West Lifeco cash of $321.7 million, 31.6 million shares of stock , and ea","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4588":"碎股","BK4585":"ETF&股票定投概念","BEN":"富兰克林资源","BK4135":"资产管理与托管银行"},"translate_title":"富兰克林资源公司：被动货币的受害者","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BEN":0.9},"content_text":"Franklin Resources has struggled with a more than 60% stock decline over the past decade due to a shift from active to passive investment management.Despite significant acquisitions like Legg Mason and Putnam Investments, Franklin's stock price continues to suffer, reflecting the challenges in the active management industry.The firm does offer a safe 6% dividend yield and trades at under nine times FY2024E EPS.   bluestockingThere never was a good war or a bad peace.” - Benjamin Franklin Shares of investment management firm Franklin Resources (NYSE:BEN) are down by more than 60% over the past 10 years as the paradigm shift from actively managed to passively managed money continues. The firm has attempted to stem the tide by making significant acquisitions, including Legg Mason, Lexington Partners, and Putnam Investments over the past five years. With a safe dividend yielding more than 6%, a P/E on FY24E EPS of 8.7, and an ongoing probe for a (likely isolated) case of alleged cherry-picking, the recent insider buying merited a deeper dive. An analysis follows below.   Seeking Alpha Company Overview: Franklin Resources, Inc. is a San Mateo, Calif.,-based investment manager that provides sponsored funds, institutional and high-net-worth account programs, and other investment vehicles primarily in the U.S. and Luxembourg. As of Aug. 31, 2024, the firm held assets under management [AUM] of $1.68 trillion, managed by 1,500-plus investment professionals in 25 countries. Known in the industry as Franklin Templeton after its 1992 buyout of Templeton, Galbraith & Hansberger, the firm was founded in 1947 and went public in 1971. Shares of BEN trade around $20.50 a share, equating to an approximate market cap of $10.75 billion. The firm operates on a fiscal year (FY) ending Sept. 30. For the avoidance of doubt, the 12 months ending Sept. 30, 2024, is FY24. Growth at What Cost? Franklin has grown through acquisition over the past five years. However, through the lens of its share price, it has not been a success. The first meaningful deal was Baltimore investment and asset management shop Legg Mason in 2020, in which the firm acquired $797.4 billion of AUM for a cash consideration of $4.5 billion. That transaction made it the sixth-largest independent investment manager in the world. It was followed by the purchase of private equity firm Lexington Partners, whose $55 billion of assets AUM were onboarded for $1.75 billion in April 2022. Shortly thereafter, European credit and private debt manager BNY Alcentra Group and its $35 billion of AUM were acquired from Bank of New York Mellon for an upfront cash consideration of $594.1 million (and earnouts up to $350 million) in November 2022. The most recent sizeable transaction occurred at the onset of 2024 with the purchase of Putnam Investments, in which Franklin paid Great-West Lifeco cash of $321.7 million, 31.6 million shares of stock (~$940 million), and earnouts up to $375.0 million for its AUM of $142 billion. These moves were more or less to stem the massive outflows in its funds in the latter half of the past decade. In FY14, Franklin held average AUM of $887.9 billion. In FY19, just prior to the announcement of the Legg Mason acquisition, its average AUM had fallen 22% to $697.0 million in an appreciating market. The chief culprit for this dreadful performance was the paradigm shift from active to passive investment management. The dirty little secret concerning large pools of money that are \"actively managed\" is that they really aren’t. Obviously, portfolio managers have bullish and bearish opinions on many stocks and bonds. However, when their investment charters dictate that they invest tens of billions of dollars into the market, it's simply impractical to execute for multiple reasons, one of which is the impact on share price when a manager is entering or exiting a massive position. As a result, these actively managed funds are essentially index funds in disguise, overweighting some positions and underweighting others in the stocks that comprise the benchmark against which they are being measured. Managers bonuses’ are typically tied to whether they beat a particular benchmark. As a result, it would be challenging to find a large actively managed fund beat (or fall short of) its benchmark index by 500 basis points or more. This dynamic also creates the patina of \"responsible asset management\" as the managers’ results never deviate too far from their respective benchmarks. That said, the public slowly awoke to this nuance during the 2010s when it realized that it was better off investing in passively managed funds with extremely low (0.015% to 0.15%) expense ratios like the S&P 500 exchange traded index funds run by Vanguard, State Street (STT), and BlackRock (BLK), vs. the 0.55% to 0.80% fees that most of Franklin’s equity funds charge. Seeing that the world was onto the fact that investment management of publicly traded stocks and bonds was a commoditized product, active managers were compelled to lower their fee structures in an attempt to stem the outflows to passive managers. With this undercurrent in mind, Franklin’s acquisitions can be seen as either an attempt to lower its cost structure as a percentage of AUM (e.g., Legg Mason) or raise its average asset management fee as a percentage of AUM (e.g., Lexington Partners) by onboarding investment vehicles that command higher management and performance fees – not as the firm’s stated long-term plan of bland diversification across asset classes, investment vehicles, and geography. These moves have not helped Franklin’s stock price, which has been on a steady decline, currently down 65% since peaking at an all-time high of $59.43 a share in 2014, save for a brief intraday descent below $15 during the pandemic selloff in April 2020. 3QFY24 Financials With that substantial headwind as a backdrop, Franklin reported its 3QFY24 financials on July 26, 2024, posting earnings of $0.60 per share (non-GAAP) on revenue of $2.12 billion versus $0.63 per share (non-GAAP) on revenue of $1.97 billion in 3QFY23, representing a decline of 5% on an increase of 8%, respectively. Sequentially, the metrics were up 7% and down 1% against $0.56 a share (non-GAAP) on revenue of $2.15 billion in 2QFY24. Long-term net outflows totaled $3.2 billion. Ending quarter AUM of $1.65 trillion was up 15% year-over-year due to the addition of Putnam and positive markets.   July 2024 Company PresentationInvestment performance further proved the above thesis on active management, with 53%, 49%, and 52% of its strategy composite AUM outperforming their respective one-year, three-year, and five-year benchmarks. Great-West Inquiry The market more or less yawned at those results. However, when it was reported on Aug. 21, 2024, that a probe had been opened by the U.S. Attorney’s Office for the Southern District of New York (and parallel ones by the SEC and DOJ) concerning the alleged allocation of profitable trades to favored accounts (a.k.a. cherry-picking) at the firm’s Western Asset Management unit, Franklin’s stock tumbled 13% to $19.78 on substantial volume of 24 million shares. Franklin said that the manager in question had been placed on leave and that it was cooperating with the investigations after initiating one of its own. The outcome of this inquiry will likely be isolated, but the reputational hit to an active management firm could be slightly more disproportionate. Balance Sheet and Analyst Commentary: At this point, the most appealing aspect of Franklin is its quarterly dividend, which has grown by one penny a share every year after jumping three cents to $0.26 in 2018. Its current $0.31 distribution equates to a 6.0% yield. The firm’s balance sheet reflects cash and investments of $5.6 billion against debt of $9.6 billion, providing it plenty of capital to repurchase 7.1 million shares of BEN at a cost of $172.0 million in the first three quarters of FY24, leaving 34.8 million shares available under its current authorization.   July 2024 Company PresentationWith the paradigm shift in the industry acting as a structural impediment, it isn’t surprising to see the Street extremely negative on Franklin’s prospects, featuring seven hold, four underperform, and two sell ratings with a median price objective in the low $20s. On average, they expect the firm to earn $2.41 a share (non-GAAP) on revenue of $6.45 billion in FY24, followed by $2.57 a share on revenue of $8.9 billion in FY25. Charles Johnson, who was the CEO from 1957 until 2013, still believes in his kids – CEO Jenny Johnson and Executive Chairman Greg Johnson – purchasing 100,000 shares of BEN at an average price of $19.08 on Sept. 11, 2024, increasing his beneficial ownership interest to 18%. UBS recently named BEN as one of 30 stocks that should benefit from recent interest rate cuts. Verdict:  There's plenty not to like about Franklin as far as growth investment is concerned. It’s a giant barge with little operating leverage. That said, it kicks off significant cash and trades at 8.65 times FY24E EPS with a safe dividend that's likely to rise another $0.04 per annum in a few months. Its business model is in secular decline, but that transition will take many years to play out, providing it with all the hallmarks of a dead money, steady dividend stock, whose return can be enhanced via covered call orders.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2477370859"}