On Tuesday, Franklin Resources Inc. (BEN) declared preliminary assets under management (AUM) of $694.1 billion by its subsidiaries for the end of October 2011. The results were up 5.2% from $659.9 billion as of September 30, 2011 and up 4.5% from $664.3 billion as of October 31, 2010.
Month-end total equity assets came in at $281.9 billion, up 10.9% sequentially, but slightly down on a year-over-year basis. Of the total equity assets, roughly 73% were from international sources, while the remaining 27% were from the U.S.
Total fixed income assets were $308.1 billion, up 3.5% from $297.7 billion as of September 30, 2011 and up 18.0% from $261.2 billion as of October 31, 2010. Of the total, tax-free assets accounted for only 23%, while the rest 77% were taxable.
Franklin recorded $96.8 billion in hybrid assets, down 4.4% from $107.8 billion as of September 30, 2011 and 14.6% from $110.8 billion as of October 31, 2010. Cash management funds as reported were $7.3 billion, up from $6.7 billion recorded in September 2011 and $6.8 billion as of October 2010.
On a quarterly basis, as of September 30, 2011, total AUM was $659.9 billion, down from $734.2 billion as of June 30, 2011, attributed to market depreciation. AUM increased 2% year over year, mainly due to net new flows and from acquisitions, partially offset by market depreciation. Simple monthly average AUM during the quarter decreased 2.0% sequentially and increased 18.0% year over year to $714.4 billion. At the end of the quarter, net new flows were $3.1 billion versus $21.7 billion in the prior quarter and $19.4 billion in the prior-year quarter.
Earnings Recap
Franklin’s fourth-quarter 2011 earnings of $1.88 per share were below the Zacks Consensus Estimate of $1.99 per share. Results were affected by higher operating expenses and lower AUM. Moreover, the results lagged earnings of $2.26 per share in the prior quarter, but were ahead of earnings of $1.65 per share in the prior-year quarter.
For fiscal 2011, earnings per share were $8.62 versus $6.33 in the prior year. However, earnings lagged the Zacks Consensus Estimate by 3 cents per share.
Peer Performance
Franklin’s closest competitor Invesco Ltd. (IVZ) reported a rise in month-end AUM for the month of October 2011. Invesco’s AUM for the reported month grew 6.2% to $635.7 billion from $598.4 billion at the end of September 2011. The rise in Invesco’s October AUM was mainly attributable to positive market returns and net inflows. Further, foreign exchange led to a $4.3 billion hike in AUM during the month under review.
Our Take
During the course of calendar year 2011, the company entered into a new strategic relationship with (Telegis) Capital Management, acquiring a 20% equity stake. This company’s experience in commodities, managed futures, and hedge fund replication, ideally balances the existing alternative offerings of Franklin.
Furthermore, in January 2011, Franklin completed the acquisition of Rensburg Fund Management, a UK equity specialist with about $1.5 billion in AUM. The Rensburg acquisition allows the company to diversify product offerings in key markets.
Moreover, Franklin’s acquisition of Balanced Equity Management in July 2011 aims to mark its presence in the Australian market by providing best investment options to satisfy local investors’ needs. Therefore, we expect Franklin to benefit from the growth potential of these transactions.
Franklin’s global footprint is an exceptionally favorable strategic point, since its AUM is well diversified. Moreover, a strong balance sheet and recently completed acquisitions are expected to strengthen the financials of the company, going forward. However, the regulatory restrictions could mar the AUM growth and increase its costs.
Franklin currently retains its Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
