Franklin Resources Inc. (BEN) is a global investment management organization that has demonstrated resilience and adaptability in the face of changing market conditions and investor preferences. With over $1.68 trillion in managed assets as of September 30, 2024, the company boasts a robust global presence and a diversified asset mix that includes equity, fixed-income, multi-asset, and alternative investments.
Company History
The company's history can be traced back to 1947, when it was founded as Franklin Distributors, Inc. Over the decades, Franklin has undergone a remarkable transformation, evolving from a regional mutual fund provider to a diversified global asset manager. In the late 1970s, the company expanded its investment capabilities by acquiring Templeton, Galbraith & Hansberger, a renowned international investment management firm. This strategic move laid the foundation for Franklin's global reach and expertise in international markets.
In the 1990s, Franklin continued its growth trajectory, acquiring Heine Securities Corporation, the parent company of the Mutual Series funds, and Bissett & Associates Investment Management Ltd., a Canadian-based asset manager. These acquisitions further strengthened the company's product offerings and geographical footprint. Additionally, the company's acquisition of Templeton in 1992 significantly bolstered its equity and global investment management capabilities.
Recent Acquisitions and Growth
The past decade has been marked by a series of transformative acquisitions that have significantly reshaped Franklin's business model. In 2019, the company acquired Legg Mason, a move that added a diverse range of investment capabilities, including fixed-income, equity, and alternative strategies, to its platform. This transaction was followed by the acquisition of Putnam Investments in 2024, which bolstered Franklin's presence in the retirement and insurance sectors. The company's history of strategic acquisitions also includes the purchase of Fiduciary Trust in 2001 and K2 Advisors in 2012, further expanding its investment expertise across asset classes and global markets.
Current Business Model
Today, Franklin Resources Inc. operates through a multi-boutique structure, where its specialist investment managers, such as Franklin Templeton, Legg Mason, and Putnam, provide a wide range of investment solutions to institutional and retail clients worldwide. This diversified approach has been a key driver of the company's financial performance, with the acquired specialist investment managers contributing significantly to its adjusted operating revenue.
Financials
Franklin's financial position remains strong, with a healthy balance sheet and ample liquidity to support its growth initiatives. As of September 30, 2024, the company reported total assets of $32.46 billion, including $4.41 billion in cash and cash equivalents. The company's debt-to-equity ratio stood at 0.98, indicating a conservative capital structure.
In terms of financial performance, Franklin Resources reported net income of $464.80 million for the fiscal year ended September 30, 2024, down from $882.80 million in the previous year. This decline was primarily driven by a $389.2 million non-cash impairment charge related to certain mutual fund contracts managed by the company's Western Asset Management (Wamco) unit, which was impacted by significant net client outflows.
The company's revenue for the fiscal year 2024 reached $8.48 billion, marking an 8% increase compared to the prior year. This growth was primarily attributed to the acquisition of Putnam and higher average Assets Under Management (AUM), partially offset by lower performance fees. Operating cash flow (OCF) for the fiscal year stood at $971.30 million, while free cash flow (FCF) was $794.20 million.
For the most recent quarter ended June 30, 2024, Franklin reported revenue of $2.12 billion, net income of $232.00 million, OCF of $514.60 million, and FCF of $468.50 million.
Geographic Performance
Franklin's global footprint extends to over 150 countries. For the fiscal year ended September 30, 2024, the company's revenue by geographic region was as follows: - United States: $4.71 billion - Europe, Middle East and Africa: $904.70 million - Asia-Pacific: $229.70 million - Americas (Excluding United States): $203.50 million - Europe, Middle East and Africa (Excluding Luxembourg): $222.40 million
Recent Performance
The company's quarterly results have been impacted by ongoing challenges at Wamco. During the fourth quarter of fiscal 2024, the company reported long-term net outflows of $32.6 billion, including $17.8 billion from Wamco. Excluding Wamco, Franklin's long-term net inflows stood at $16 billion for the fiscal year, compared to net outflows of $5.2 billion in the prior year.
Despite these challenges, Franklin saw a 25% increase in long-term inflows compared to the prior year, reaching $319 billion in fiscal year 2024. The company's private markets funds also performed well, raising $14.8 billion in fiscal year 2024, in line with their targets.
Strategic Initiatives
Despite these headwinds, Franklin has remained focused on diversifying its business and positioning itself for long-term growth. The company's acquisition of Putnam Investments in 2024 has strengthened its presence in the retirement and insurance sectors, while continued investments in alternative assets, exchange-traded funds (ETFs), and digital wealth management solutions have broadened its product offerings and distribution capabilities.
The company continues to focus on expanding its capabilities across public and private markets to meet client demands. Key growth areas include ETFs, retail SMAs, Canvas, private markets, and digital/technology initiatives.
Future Outlook
Looking ahead, Franklin Resources is guiding for a stable expense base in fiscal 2025, with the potential for revenue growth to offset the impact of the challenges at Wamco. The company's management team remains committed to disciplined expense management and operational efficiencies, which will be crucial in navigating the evolving market landscape.
For the upcoming fiscal quarter, Franklin expects: - An effective fee rate (EFR) in the mid-37 basis point area, slightly higher than the prior quarter, excluding performance fees. - Compensation and benefits of $860 million, including $50 million of performance fees and $45 million of annual accelerated deferred compensation. - Information systems and technology (IS&T) expenses of $155-$160 million, including $4 million higher spend for Gen AI and investment management platform. - Occupancy expenses of $78-$80 million, inclusive of double rent related to the New York City office transition. - General and administrative (G&A) expenses around $180 million, including slightly higher legal fees. - GAAP tax rate to stay in the 24-26% range, though the first quarter typically has a higher rate due to deferred compensation vesting.
Liquidity
Franklin maintains a strong liquidity position with a debt-to-equity ratio of 0.98 as of September 30, 2024. The company held $4.41 billion in cash and cash equivalents and maintained an $800 million 5-year revolving credit facility that remains undrawn. The current ratio and quick ratio both stood at 3.24, indicating a healthy short-term financial position.
Ongoing Investigations
The company is currently facing an ongoing investigation by the DOJ, SEC, and CFTC regarding certain past trade allocations of treasury derivatives in select Western Asset Management (WAMCO) managed accounts. In August 2024, the company announced that Ken Leech, the former Co-CIO of WAMCO, was on a leave of absence following receipt of a Wells notice from the SEC. This has resulted in significant net outflows from WAMCO, which the company is working to address.
Conclusion
In conclusion, Franklin Resources Inc. is a diversified global asset manager that has demonstrated resilience and adaptability in the face of changing market conditions. While the company has faced headwinds related to its Wamco unit and ongoing investigations, its strategic acquisitions, diversified product offerings, and focus on operational efficiency position it well to capitalize on future growth opportunities and deliver value to its shareholders. The company's strong financial performance, global presence, and commitment to innovation in key growth areas such as ETFs and private markets suggest a positive outlook for the future, despite the challenges it currently faces.