Room for Improvement but Franklin Templeton Fares Better Than Most

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 Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

Navigating the promise and peril of diversity has long been Franklin Resources’ primary challenge from a corporate culture standpoint. That extends back to at least 1973, when then-CEO Charles B. Johnson moved the headquarters of his small, albeit public, New York firm to San Mateo, California, to facilitate the integration of new acquisition Winfield and Co., a growth-oriented larger rival that had fallen on hard times in the market downturn of 1969-70. Challenges abounded, ranging from data transfer, to finding new roles for key Winfield personnel, to merging or repurposing funds. The WinCap fund, for example, became Franklin Gold and Precious Metals FKRCX, a timely shift that helped investors during the 1973-74 bear market and again as inflation raged in the late 1970s and early 1980s. The crown jewel of the Winfield acquisition, however, was the foothold it gave the firm in the fast-growing California marketplace.

In retrospect, the Winfield acquisition not only provided Franklin with a bigger customer base, it also set the stage for broadening the firm’s investment options through subsequent acquisitions. That was necessary because, while innovative fixed-income strategies like Franklin’s Tax-Free municipal lineup helped the firm thrive well into the 1980s, they also left it underrepresented in the equity arena. Seizing on an opportunity presented by the 1987 crash, Franklin’s acquisition of L.F. Rothschild, Unterberg, Towbin came with what is now

Fast forward to the present, and Franklin Templeton Investments is a global firm that oversees more money abroad than it does at home. Fixed-income strategies continue to be prominent in its lineup, ranging from the massive

Franklin Templeton’s penchant for growth through acquisition has required the firm to walk a fine line. Each investment team shares compliance, call centers, marketing, distribution, and other administrative capabilities, for example, but does its own hiring and training. hough the top executives from each business unit report up to CEO Gregory Johnson, the son of Charles B. Johnson, portfolio managers run their own strategies and rely on their own analyst teams. 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.

Franklin Templeton has in recent years sought to encourage dialogue between its teams. The firm now has a centralized equity research platform to facilitate data sharing, but it has been installed so as to still respect individuality. The fiercely contrarian Mutual Series team has access to this data set but prefers to keep its investment insights to itself. There are other forums for managers to express their views, however, such as joint research meetings held annually throughout the globe.

Another initiative designed to disseminate research occurred in early 2015. Michael Hasenstab and his band of fellow Ph.D.s separated from the Franklin Templeton Fixed Income Group to form the Templeton Global Macro team. The moves give them a greater platform to share their views firmwide in the belief that the recent trend of central bank actions having outsized effects on the markets is here to stay, at least for the time being, and that money managers should pay greater attention to macroeconomics. As an example of the kind of impact Hasenstab’s team could have, Gregory Johnson has noted that Templeton’s global equity managers might decide to hedge foreign-currency exposure, something they’ve not done in the past.

Templeton’s managers and those of the other groups retain their investment autonomy. They’ve sometimes used that freedom to make risky bets, especially in fixed income. Investors in several of Franklin’s seemingly staid lineup of state-focused municipal-bond funds might be surprised to know they hold meaningful positions in now-questionable Puerto Rican debt. Franklin New Jersey Tax-Free Income FRNJX leads the way here, with its 6% stake as of June 2015. In addition, Hasenstab’s willingness to buy Irish and Hungarian sovereign debt in 2011 for Templeton Global Bond may now appear to have been very shrewd, but the outcome of its current 2.2% Ukraine position could prove less so.

Still, Hasenstab has earned a measure of trust. His fund boasts a near category-leading record since his year-end 2001 start date, and it is arguably well-positioned for the future, especially if interest rates rise as expected. Templeton Global Bond may be a standout, but Franklin Templeton funds have in general served long-term investors well. Even if the firm’s average Morningstar Rating of 2.91 stars suggests mediocrity, it is noteworthy that slightly more than three fourths of the roughly 90 U.S. open-end Franklin Templeton funds old enough to have a 15-year track record, as of mid-2015, had finished in the top half of their respective peer groups.

Credit for the firm’s success in creating and cultivating this diverse yet functional family of funds belongs largely to a cadre of Johnsons. The historically crucial contributions of Sir John Templeton, Max Heine, and Michael Price notwithstanding, they are the family behind the families. Rupert Johnson Sr. may have founded the firm in 1947, but his son Charles B. Johnson, who took it over in 1957 at the ripe-old age of 24 and labored until his mid-June 2013 retirement, did more than any other to ensure its success. Along the way, Charles had significant help from his younger brother Rupert Johnson Jr., who joined in 1965 and still serves today, as well as older brother Andrew, whose belated addition in 1974 and retirement in the mid-1990s to become a full-time Roman Catholic deacon did not preclude major contributions to the firm’s municipal-bond approach.

Charles got help from his kids, too. All seven of them spent at least some time on the firm’s payroll and three made it their careers, each after brief stints elsewhere. Son Gregory Johnson started on the trading desk in 1985 and became a manager on flagship

By far, though, the most checkered path, beginning in 1981, belongs to eldest son Charles ("Chuck") E. Johnson. He had been a candidate to take his father’s place, thanks to leadership shown in the Templeton acquisition and the firm’s international operations, until Chuck’s involvement in a domestic violence incident with his wife in September 2002 led to his subsequent resignation. After dealing with the immediate personal, professional, and legal ramifications of that incident, Chuck in 2004 returned to investing, but not Franklin Templeton, by founding Tano Capital, a private equity shop focused on India and China. He maintained close ties with his old firm, however, and in June 2013, roughly a decade after his departure, Chuck was named to Franklin Resources’ board of directors.

The timing of the move raises questions in so far as it corresponded to his father’s retirement from that same board. So, too, does its propriety, even if it makes sense from a business perspective. In these respects, Franklin Resources leaves itself open to the charge of nepotism, especially because Johnson family members hold three of 10 board seats and, as of late 2014, controlled at least 37% of the firm’s publicly traded shares, making any move they support hard to oppose.

There’s no question the Johnsons have provided steady and capable leadership across three generations, but their sway over the firm bears monitoring. So do the firm’s efforts to foster collaboration among investment teams that have varying cultures, styles, and histories. Indeed, pushing too hard could encroach on the autonomy that has been key to their success. The balance between the firm’s marketing prowess, epitomized in a "Ben Head" logo crafted to resemble the U.S. $100 bill, and its priority on investment performance is also worth watching. For example, between mid-2010 and mid-2015, promotion of Franklin Rising Dividends contributed to an eightfold increase in its asset base, which in turn corresponded to a sizable increase in the number of its holdings combined with lackluster performance.

In other ways, Franklin could strive to move beyond good to great. Fees are reasonable overall but could be lower still, especially on mammoth offerings like

That excellence is not as pervasive at Franklin Templeton as it could be does not entail that mediocrity characterizes the firm. Even if not consistently the best, Franklin Templeton is across the board better than most, earning a B grade for Corporate Culture.

This article is the Corporate Culture portion of the Morningstar Stewardship Grade for funds for this fund family. Visit our corporate website to see Morningstar's Stewardship Grade methodology.