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Franklin Resources Earnings: Recovery Underway, but Headwinds Remain for Asset Managers

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Franklin Resources Inc
(BEN)

There was little in Franklin Resources’ BEN 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.

Franklin closed the March quarter with $1.422 trillion in assets under management, up 2.5% sequentially but down 3.7% year over year. Net long-term outflows of $3.7 billion during the second quarter were a marked improvement over $10.9 billion during the first quarter and well below the quarterly run rate of $7.4 billion in net outflows seen the prior eight quarters.

The outflows were driven primarily by Franklin’s equity platform ($8.3 billion), offset somewhat by inflows into its multi-asset ($1.5 billion), fixed-income ($1.8 billion), and alternatives ($1.3 billion) segments. While the firm is on pace to match our full-year forecast for negative 1% to negative 2% organic AUM growth during fiscal 2023, we could see more headwinds in the back half of the year if the United States sees a deeper recession than we are projecting.

While average AUM declined 6.4% year over year during the second quarter, Franklin reported only a 5.3% decrease in base management fee revenue as mix shift helped increase its realization rate to 41.8 basis points from 41.3 basis points in the year-ago period. Higher performance fee income added to total revenue, but weaker sales/distribution and shareholder servicing fees led to a 7.4% decline in second-quarter revenue. For the first half of fiscal 2023, Franklin’s top line declined 9.5%.

First-half GAAP operating margin of 11.5% and adjusted operating margin of 13.2% were 900 and 1,200 basis points lower year over year as negative operating leverage in the asset manager’s income statement was compounded by higher compensation costs, driven primarily by higher performance fee-related compensation and higher expenses related to the start of the calendar year.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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