Franklin Resources Earnings: Bear Market Recovery Underway, but Headwinds Remain for the Firm

There was little in Franklin Resources BEN 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.

Franklin closed out the June quarter with $1.432 trillion in assets under management, up 0.7% sequentially and 3.7% year over year. Net long-term inflows of $200 million during the firm’s fiscal third quarter were a welcome surprise, as we had the firm posting $13.2 billion in outflows for the period. That said, we had also forecast much better market performance than Franklin reported for the quarter.

The inflows were driven primarily by the firm’s alternatives ($4.0 billion) and multi-asset ($2.3 billion) platforms, with outflows from its equity ($3.0 billion) and fixed-income ($3.1 billion) operations detracting from overall results. While Franklin is on pace to match our full-year forecast of negative 1% to negative 2% organic AUM growth during fiscal 2023, we could foresee the firm outperforming if flows stay on the trajectory we saw during the June quarter.

While average AUM was down 1.4% year over year during the third quarter, Franklin reported a 1.9% decrease in base management fee revenue as mix shift lowered the firm’s realization rate to 42.0 basis points from 42.3 basis points in the year-ago period. Slightly higher performance fee income added to total revenue, but weaker sales/distribution and shareholder servicing fees led to a 3.1% decline in net revenue. On a year-to-date basis, Franklin’s top line declined 7.5%, in line with our fiscal 2023 forecast.

As for profitability, year-to-date GAAP (and adjusted) operating margins of 13.0% (29.0%) were 650 (650) 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 general and administrative expenses.