Franklin Falls After Missing Estimates on Lower Fund Fees

Jul 30, 2014 4:23 pm ET

(Updates with closing stock price in second paragraph.)

July 30 (Bloomberg) --- Franklin Resources Inc., manager of the Franklin and Templeton mutual funds, fell after profit fell short of analysts’ estimates on declining sales of its most lucrative fund offerings.

Net income for the three months ended June 30 was $578.9 million or 92 cents a share, compared with $552.3 million or 86 cents a share, a year earlier, the San Mateo, California-based company said today in a statement. Analysts in a Bloomberg survey expected earnings of 95 cents, sending shares down 1.8 percent to $56.07 in New York trading.

“They were hurt because growth was stronger in some of their lower-fee strategies rather than in higher-fee products, like emerging market stocks,” Michael Kim, an analyst with Sandler O’Neill & Partners LP, said in a telephone interview.

Chief Executive Officer Gregory Johnson has been emphasizing Franklin’s diversification, pointing out that the firm has significant holdings in both stock and bond funds and has sales in countries around the globe. Franklin’s global equity funds, which generally charge higher fees than other types of products, experienced withdrawals in the quarter as investors added money to funds that invest in a mix of stocks and bonds. The firm attracted $2.6 billion in new investor money in the quarter, down from $8.4 billion a year earlier.

Shares Fall

Franklin lost 2.9 percent this year compared with a gain of 1.7 percent for the 18-member Standard & Poor’s Index of custody banks and asset managers.

The company had 42 percent of its assets in stock funds and 39 percent in funds that buy bonds as of June 30. At the end of the first quarter, 35 percent of Franklin’s assets were held by investors outside the U.S. Johnson, at a May investor conference, said the firm had more than $6 billion in assets under management in 16 countries and regions.

U.S. investors overall have been adding money to both stock and bonds funds in 2014. Stock funds attracted $92 billion in the first six months of this year compared with $71 billion for bond funds, according to data from Chicago-based Morningstar Inc.

Hasenstab’s Fund

For a number of years, Franklin relied heavily on deposits to its $72 billion Templeton Global Bond Fund. Run by Michael Hasenstab, the fund outperformed 99 percent of peers over the past 10 years, Morningstar data show.

The fund has experienced redemptions this year as Franklin has become the world’s largest mutual-fund investor in offshore debt from war-torn Ukraine, according to data compiled by Bloomberg. Hasenstab defended the investment at the May investor conference, saying he was “more excited” about the prospects for Ukraine than he was a year earlier.

Ukraine’s dollar-denominated debt gained about 7 percent this year, data from JPMorgan Chase & Co. show.

Franklin’s largest mutual fund, the $96 billion Franklin Income Fund, attracted more than $2 billion in the first six months of 2014, according to Morningstar. The fund beat 81 percent of rivals over that stretch.