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