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Rating:Three Things to Know from Franklin’s Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, February 04, 2013

Three Things to Know from Franklin’s Earnings

Reported by Tommy Fernandez

The year 2012 was a solid one earnings-wise for Franklin, and the globe-spanning asset manager expects a better year as the markets, both here and overseas, play into the firm’s areas of strength.

First the basics. For the quarter ended Dec. 31, 2012, the firm reported net income of $516.1 million or $2.42 per diluted share for the quarter ended December 31, 2012, as compared to $492.1 million or $2.31 per diluted share for the previous quarter and $480.8 million or $2.20 per diluted share for the quarter ended December 31, 2011.

Total assets under management (“AUM”) were $781.8 billion at December 31, 2012, up $31.9 billion or 4 percent during the quarter. The increase was primarily due to $24.8 billion in market appreciation and $8.7 billion from an acquisition. AUM increased $111.5 billion or 17 percent year over year, primarily due to $94.0 billion in market appreciation and $13.6 billion of net new flows.

If you look at the SeekingAlpha transcript of the earnings call, and the company’s earnings information, you’ll get at least three takeaways. There was a lot said in this transcript. It’s worth viewing in depth.

The three major takeaways are as follows: POINT #1: Franklin Expects Growing Retirement Momentum and a Retail Rebound,…Eventually
POINT #2: Franklin has High Hopes in Equity
POINT #3: When it Comes to Product Development Slow and Steady Wins the Race
Now to elaborate on these points:

POINT #1: Franklin Expects Growing Retirement Momentum and a Retail Rebound,…Eventually
Chief executive and president Gregory Eugene Johnson had this to say regarding the growth of 401k streams on the institutional side.
I think there continues to be strong interest institutionally. We have had a very significant win that we expect to fund this quarter in emerging markets debt. I think the 401(k) side continues to grow. It's still not a big portion. But looking at the overall flows of over $5 billion of international bonds last quarter, it's safe to say that the momentum that we had back over a year ago has certainly returned on the strength of the performance, and we expect that to continue.
Johnson was also optimistic about a rebound, albeit gradual one, in retail demand for some products.
Yes. I think it's a good question and one that if I had to look at any area and say where we underperformed as far as distribution, it'd certainly be in that category, and a lot of that on the retail side. I mean, Templeton had underperformed for a while, had made an early bet on Europe and financials. And fortunately, that's paid off considerably. If you look out how quickly the long-term records that were lagging are now back in the top 2 quartiles, 1-, 3-, 5-year, 10-year even pulling back. So it just takes time. Once you fall out of favor with advisors, it just takes -- it just doesn't snap back as fast as, say, the institutional world that looks more real time at performance. We did have a couple of large redemptions in Canada with global equity in the last quarter, which totaled about $2 billion between Canada and Asia. There were a couple of redemptions in that category. So that certainly contributed to your net outflow number. But I think we feel confident that -- and we've been very focused on getting the message out on the retail side over the last year, and we have a pretty strong story to tell with good performance. So I hope and we expect that to snap back. But on retail flows, it just takes a little bit more time.
POINT #2: Franklin has High Hopes in Equity
During the conference call, Johnson was asked whether Franklin would do anything significantly different in 2013 compared to previous years. His answer was that his firm would keep its approach consistent, which included a good deal of faith in equities.
No, I think the message is pretty consistent versus '11 and '12, and that's that we want to continue to focus on the importance of equity investing and make sure that we're recognized as a leader in that area. So that message will continue. But I don't think there's any big changes of strategy other than that, that will continue to be a focus for us. We also have our tactical asset allocation funds, things like that, that have been out there, continue to develop our solutions as far as product development. But I don't really, right now, expect to see a big shift in our strategy and our spend and really our flows from what we've seen over the last year or 2.

No, I think the message is pretty consistent versus '11 and '12, and that's that we want to continue to focus on the importance of equity investing and make sure that we're recognized as a leader in that area. So that message will continue. But I don't think there's any big changes of strategy other than that, that will continue to be a focus for us. We also have our tactical asset allocation funds, things like that, that have been out there, continue to develop our solutions as far as product development. But I don't really, right now, expect to see a big shift in our strategy and our spend and really our flows from what we've seen over the last year or 2.

POINT #3: When it Comes to Product Development Slow and Steady Wins the Race
When asked about the future impact that newly acquired alt manager K2 Advisor Holdings would have on Franklin’s alt development, Johnson described a patient, methodically thinking process. For example, when asked by an analyst whether the firm might look into asset clases out of fund of funds, like global real estate, private equity or otherwise, he had this to say.
I think we're in both of those, private equity and global real estate. And whether there's an opportunity to expand that platform, that's certainly something that we're always open to doing if it makes sense. So as we've said before, there's no hard rule one way or another. If something makes sense and we can build scale and build a stronger group, we'll do that. But we do have that capability today certainly with Darby and our Franklin real estate group.

For more information turn to the SeekingAlpha transcript of the earnings call, and the company’s earnings information.  

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