Bloomberg News

Franklin Profit Drops 4.1% on Decline in Global Stock Prices

February 01, 2012

(Adds closing share price in fifth paragraph.)

Feb. 1 (Bloomberg) -- Franklin Resources Inc., manager of the Franklin and Templeton mutual funds, said fiscal first- quarter profit fell 4.1 percent amid a slump in worldwide stocks and withdrawals from the firm’s best-selling global bond fund.

Net income for the three months ended Dec. 31 declined to $480.8 million, or $2.20 a share, from $501.2 million, or $2.23, a year earlier, the San Mateo, California-based company said today in a statement. Earnings a year earlier were boosted by $26.5 million in insurance recoveries, Matthew Walsh, a company spokesman, said in an e-mail.

The $57 billion Templeton Global Bond Fund run by Michael Hasenstab suffered redemptions in November and December after three straight years of deposits as clients reacted to slumping performance. The firm is known for international and fixed- income funds such as Templeton Global Bond, which has beaten 98 percent of peers in the past five years even after trailing 90 percent in 2011, according to data compiled by Bloomberg.

“We knew the global fixed-income business was going to suffer a bit because of the hiccup in performance,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said in a telephone interview. “Looking ahead the flows should improve.”

The company was expected to earn $2.09 a share, according to the average estimate of 12 analysts in a Bloomberg survey. Franklin gained 5.5 percent, the most since Nov. 30, to close at $111.97 in New York trading. The firm’s shares have increased 17 percent this year.

‘Not Immune’

Franklin had net redemptions of $15.6 billion in the quarter, with $11.1 billion of that coming from one institutional client, the company said in the statement. In the two previous quarters, Franklin attracted $3.1 billion and $21.7 billion in net deposits.

Investors pulled money from the firm’s equity and fixed- income funds, company data show. Long-term sales dropped with the steepest decline coming from investors outside the U.S., Chief Executive Officer Gregory Johnson said in pre-recorded remarks.

“We are not immune to global market volatility,” Johnson said.

Franklin had $175 billion in global bond assets at the end of 2011, almost four times the level at the end of 2008, company reports show. Total assets were $670 billion as of Dec. 31.

Templeton Global Bond was a magnet for much of that growth. The fund more than quintupled in size as assets grew by $46 billion in the past three years, according to Bloomberg data. A version sold in Luxembourg quadrupled.

Year-End Withdrawals

The fund attracted a net $15 billion in the first 10 months of 2011, the most of any U.S. mutual fund, according to data from Chicago-based Morningstar Inc. In the last two months of the year investors withdrew $1.8 billion.

Hasenstab’s bets on currencies failed to pay off last year. The fund had 45 percent of its assets in Asia Pacific currencies as of Aug. 31, including 15 percent in the South Korean won, 12 percent in the Australian dollar and 11 percent in the Malaysian ringgit, according to a report filed in November with the U.S. Securities and Exchange Commission.

The decline in those currencies against the U.S. dollar was the result of “temporary panic and contagion as opposed to fundamental problems,” Hasenstab said in a September note posted on Franklin’s website. In an October note, he repeated his longstanding view that the most attractive investments are bonds and currencies outside the U.S., the euro area and Japan.

Improved Performance

The won, the Australian dollar and the ringgit have all appreciated against the dollar this year and Templeton Global Bond climbed 5.3 percent through yesterday, better than 98 percent of rivals, Bloomberg data show.

On the equity side, 72 percent of Franklin’s holdings are in international stocks, company data show. The MSCI World Index fell 7.6 percent in 2011.

About 11 percent of Franklin’s total assets are in U.S. stocks, which has shielded the company from the impact of investor flight from funds that invest in the country’s equities. Investors pulled $135 billion from domestic stock mutual funds in 2011, the fifth straight year of withdrawals, according to data from the Investment Company Institute, a Washington-based trade group.

Johnson’s pay climbed 47 percent to $9.9 million in the fiscal year ended Sept. 30, the company said last week in a regulatory filing.

--With assistance from Christian Baumgaertel in Boston. Editors: Josh Friedman, Steven Crabill

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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