Company Reports

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

We've increased our fair value estimate for narrow-moat-rated Franklin Resources to $28 per share from $26 to account for revised near-term expectations for AUM, revenue, and profitability since our last update. With the U.S. equity markets rising 12% in the December quarter of 2023, and the credit markets also rising 7%, Franklin reported a 6% increase in its assets under management, or AUM, during the period. This left the firm in a better position than we had been expecting coming into calendar 2024, allowing us to raise our fair value estimate close to 8%.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale in existing product sets as well as pursue nonaffected investment products like alternative assets to offset the impact of fee and margin compression driven by the growth of low-cost passive products.

While there was little in Franklin Resources fiscal first-quarter results that would alter our long-term view of the firm, we expect to raise our $26 per share fair value estimate slightly once we've incorporated these results into our valuation. This would leave the company's shares fairly valued relative to their Jan. 29 trading price.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale in existing product sets as well as pursue nonaffected investment products like alternative assets to offset the impact of fee and margin compression driven by the growth of low-cost passive products.

While there was little in Franklin Resources' fiscal fourth-quarter results that would alter our long-term view of the narrow-moat firm, we expect to lower our $28 per share fair value estimate 5%-10% to account for the impact that continued equity and credit market headwinds will have on results in both the near and long term. We view the shares as being modestly undervalued.

We've lowered our fair value estimate for narrow-moat Franklin Resources to $28 per share from $29 to account for revised near-term expectations about assets under management, revenue, and profitability since our last update. We view the shares as slightly undervalued.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale in existing product sets as well as pursue nonaffected investment products like alternative assets to offset the impact of fee and margin compression driven by the growth of low-cost passive products.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale in existing product sets as well as pursue nonaffected investment products like alternative assets to offset the impact of fee and margin compression driven by the growth of low-cost passive products. Following its purchase of Legg Mason in February 2020, Franklin Resources has been focused more exclusively on alternative asset managers when acquiring businesses, so we were surprised to see it move for Putnam, a traditional asset manager that was far from a prized asset.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

There was little in Franklin Resources fiscal third-quarter results that would alter our long-term view of the firm. We expect to leave our $28 per share fair value estimate in place. We view the shares as being fairly valued right now.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale in existing product sets as well as pursue nonaffected investment products like alternative assets to offset the impact of fee and margin compression driven by the growth of low-cost passive products. Following its purchase of Legg Mason in February 2020, Franklin Resources has been focused more exclusively on alternative asset managers when acquiring businesses, so we were surprised to see it move for Putnam, a traditional asset manager that was far from a prized asset.

While we had expected to lower our fair value estimate for narrow-moat-rated Franklin Resources following the firm's announcement that it was acquiring Putnam Investments from Canadian life insurer Great-West Lifeco for $925 million (composed of 33.3 million shares of its common stock when the deal closes and another $100 million in cash six months after the transaction closes), as well as potentially $375 million more in cash between three to seven years after the deal is consummated if certain growth targets are met, there was relatively little change to our valuation once we input all the specifics of, as well as the potential benefits from, the transaction into our model.

We've been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale within existing product sets, as well as pursue nonaffected investment products like alternative assets, as a means of offsetting the impact of fee and margin compression being driven by the growth of low-cost passive products. Following its purchase of Legg Mason in February 2020, Franklin Resources has been focused more exclusively on alternative asset managers when acquiring businesses, so we were surprised to see the firm move more recently for Putnam, a traditional asset manager that was far from a prized asset.

We expect to lower our $26 fair value estimate for narrow-moat Franklin Resources following the firm's announcement that it is acquiring Putnam Investments from Canadian life insurer Great-West Lifeco for an estimated up-front consideration of $925 million, comprising 33.3 million of its shares at the deal's close and $100 million in cash six months after the transaction. Franklin is also obligated to pay up to $375 million to Great-West anywhere between three and seven years after the deal is consummated, depending on the growth of a newly formed partnership between the U.S.-based asset manager and Great-West and its parent company, Power Corp. of Canada, to distribute Franklin's products, especially in the wealth, insurance and retirement channels.

We've lowered our fair value estimate for narrow-moat-rated Franklin Resources to $26 per share from $28 after updating our valuation model to account for weaker equity and credit market returns in the near term, which will have a negative impact on assets under management. Our new fair value estimate implies a price/earnings multiple of 11.1 times our fiscal 2023 earnings estimate and 10.1 times our fiscal 2024 earnings estimate. For some perspective, during the past five (10) years, the company's shares have traded at an average of 10.6 (13.2) times trailing earnings.

While the combination of rising interest rates and an equity market selloff has negatively affected Franklin Resources' assets under management, we remain cautiously optimistic about the firm over the medium term. Franklin lost $269 billion to market losses and another $28 billion to outflows during fiscal 2022 (ended September) before recovering some to $1.420 trillion at the end of March 2023. That said, ongoing uncertainty about the U.S. debt ceiling, as well as the prospect of a recession in the near term, are likely to keep both equity and credit markets more volatile.

There was little in Franklin Resources' fiscal second-quarter results that would alter our long-term view of the firm, and we expect to leave our $28 fair value estimate in place. We view the shares as slightly undervalued.