This diverse firm has done well caring for fundholders' capital.
Morningstar recently issued a new Stewardship Grade for Franklin Templeton. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a B. What follows is Morningstar's analysis of the firm's corporate culture, for which Franklin Templeton receives a B. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Principia®, Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).
Franklin Resources Inc. traces its roots back to 1947, when Rupert H. Johnson Sr. formed a mutual fund management company named after Benjamin Franklin. Though now a public company, it's still a family-run business. Rupert Johnson Jr. is vice chairman. His other son, Charles B. Johnson, was chairman until he passed the reins to his own son Greg Johnson, who is also CEO and president. The family still owns a big chunk of the firm: Charles B. Johnson and Rupert H. Johnson Jr. themselves own a combined 34% of the firm. With no intention of selling to outsiders, future leaders will likely continue to come from the Johnson family.
The company has come a long way since 1947. Though it now offers a variety of services including fund administration, custodial, trustee, and fiduciary services, its culture is still driven by investment managers. CEO Johnson was comanager of Franklin Utilities FKUTX for almost 20 years, and his father, Charles B. Johnson, helped run funds such as Franklin Income FKINX. Marquee investment managers have also played a role in Franklin Resources' acquisition strategy. In 1992, Franklin acquired Templeton, Galbraith, and Hansberger, home to legendary investor Sir John Templeton and the Templeton family of funds. Four years later, Franklin bought Heine Securities Corporation, which included the Mutual Series offerings made famous by value manager Michael Price. The firm has also grown by acquiring foreign fund companies. It owns the Bissett lineup in Canada, for example. The firm manages more than $840 billion in assets around the world and ranks as the fifth-largest fund company in the United States behind Vanguard, Fidelity, American Funds, and PIMCO.
The firm's growth through acquisition has created an unusual corporate structure. Franklin Resources is largely three separate fund lineups: Franklin, Templeton, and Mutual Series. The parent firm has taken a hands-off approach to managing those families, though there has been some synergy. Each family shares compliance, call centers, marketing, distribution, and other administrative capabilities, for example, but they do their own hiring and training. Though the top executives from each business unit report up to Greg Johnson, portfolio managers are left to their own devices, and the analyst ranks at each aren't shared across the company. In doing so, the company has been able to leverage economies of scale without encroaching on the investment cultures that made the individual lineups attractive acquisitions in the first place.
To say the investment styles at each of the three subgroups are distinct is an understatement. Take Mutual Series, for example: These funds run a strategy that hinges on buying undervalued companies with catalysts that could lead to a turnaround. The funds can own both common equity shares and distressed debt. Meanwhile, Templeton funds specialize in overseas investing, both in developed and emerging markets. With portfolio managers and analysts spread around the world, this team's funds use an analyst-driven approach to investing. Each individual manager still has research duties.
Franklin funds are divided into two teams. The value team, led by William Lippman, searches for U.S. stocks trading at discounts to their book values. The other group, led by Ed Jamieson, manages core- and growth-oriented U.S. and non-U.S. equity funds.
Finally, the bond team operates under both the Franklin and Templeton brands. This team hits the pavement when conducting its global research, meeting with local policymakers, business leaders, journalists, and others. Investors appear to have taken notice of the team's strength and sensible process as much of the firm's asset growth has come from bond funds in recent years. Templeton Global Bond TPINX in particular has attracted heavy flows and now has more than $70 billion in just U.S. mutual fund assets. That said, the fund has yet to exhibit any negative effects of asset bloat, and so far neither Franklin Templeton nor manager Michael Hasenstab has given any indication that its capacity is becoming constrained.
Franklin Resources has avoided launching trendy strategies, sticking to funds that fit in its admittedly broad wheelhouse. When it lacks in-house expertise, Franklin acquires it. So when senior management saw potential in alternative strategies but lacked the internal firepower in alternatives, it acquired a majority interest in K2 Advisors in November 2012. K2, which specializes in fund of hedge fund management, will manage the recently launched Franklin K2 Alternative Strategies Fund. It wouldn't surprise anyone to see more multistrategy funds like this one launched in the near future.