Early one morning in October 2013, Franklin Templeton announced a “record year” for the California-based investment manager.
Striking a pleased note on a call with analysts, Greg Johnson, chief executive and grandson of the founder of the fund house, said the company had notched up its highest-ever revenue and profits that year. Assets under management, he added, were near an all-time high.
The US investment company finished 2013 as the fifth-best selling mutual fund manager in the world, according to Morningstar, the data provider.
But within 12 months, Franklin’s fortunes were turned upside down. It ranked as one of the 30 worst-selling asset managers of about 3,000 examined by Morningstar in 2014. By 2016, it was the worst-selling fund house in the world.
Franklin’s swift fall from grace is a cautionary tale of how disappointing performance and declining interest in an asset class can wreak havoc for even the most seasoned of fund houses.
The question now is whether Franklin, which is the second-largest listed asset manager in the US by market capitalisation, can turn its fortunes round.
Set up by Rupert Johnson in 1947, the fund house was named after Benjamin Franklin, taking inspiration from the US founding father’s ideas of frugality and prudence when it came to saving and investing.
Over the years, it has grown to become one of America’s largest asset managers, with a reputation as a bond specialist with strong skills in emerging markets. Its fund managers, including high-profile investors such as Mark Mobius and Michael Hasenstab, are known for taking big, and often contrarian, bets.
But some of these investments, including on short-duration bonds, Ukrainian debt and the energy sector, failed to pay off in recent years, hurting fund performance in the process. According to Moody’s, the rating agency, more than 50 per cent of Franklin’s assets under management underperformed peers over a three-year period to the end of September.
The investment house, which is an advocate of active fund management, has also suffered from investors scaling back their emerging market exposure in 2014 and 2015, and a rotation away from bond funds. Amid these problems, the company has lost several senior staff members.
Christopher Harris, an analyst at Wells Fargo, the US bank, says: “If you wind the clock back a year and a half, basically everything that could go wrong went wrong for Franklin.”
The company, whose share price has fallen by nearly a quarter since the start of 2014, also lost out as investors have moved away from actively managed funds in favour of cheaper passive products that track an index.
In recent months, however, there have been signs of a turnround for the fund house. Performance of its flagship funds — global bond, income and growth equity products — has improved, while investor redemptions have slowed to their lowest level since mid-2015.
The company’s share price rallied in the wake of Donald Trump’s election as investors bet the company would benefit from the incoming US president’s policies.
Franklin is expected to one of the biggest winners of any watering down of the Department of Labor’s fiduciary rule.
Last month, the president announced a review of the rule, which was due to come into force in April and which requires financial advisers to act in the best interest of their clients.
Franklin relies heavily on advisers to distribute its products, but the rule was expected to lead to a decline in active fund sales.
There is also hope that the company would benefit from a tax holiday. Franklin has a $6.5bn overseas cash pile, which it is currently unable to bring back to the US without incurring a large tax bill.
Mr Trump has previously said he would reduce the tax liability for US companies that want to retrieve overseas profits, driving expectations that businesses such as Franklin will use offshore profits for share buybacks or dividend payouts.
“We continue to monitor the situation here and we are optimistic something will happen soon,” a spokesperson for Franklin says of the potential tax change.
Mr Harris, who is the only analyst to have a buy rating on Franklin, says he is seeing a lot more interest in the company’s shares.
“The sentiment around the stock has improved,” he says. “As bad as it was [for Franklin], things are now heading in the right direction.”
In late February, Brian Bedell, an analyst at Deutsche Bank, upgraded Franklin from sell to hold. “Though we expect outflows to persist this year, we no longer see substantial downside in the shares,” he wrote in a note to clients.
Neal Epstein, an analyst at Moody’s, adds that the strength of Franklin’s brand, and the company’s “rock-solid balance sheet” — where the company holds much more cash than debt — also bodes well.
Some analysts believe the company’s large cash pile could be used for acquisitions, helping to boost assets under management and to diversify the business. “They haven’t had a major acquisition recently, but historically the way Franklin has grown is by acquiring capabilities,” says Alec Lucas, an analyst at Morningstar.
But other analysts are more cautious. In February, Credit Suisse, the Swiss bank, adjusted its forecast for the company, reducing its earning per share outlook, as well as revising its revenue and assets under management assumptions.
Mr Harris admits: “The business faces all sorts of challenges, not least the flows migrating out of active and into passive. And they don’t really have a good solution to offset that.”
Franklin launched a suite of exchange traded funds last year that are either actively managed or invest using a non-market capitalisation benchmark, known in the industry as smart-beta ETFs, but critics say this is not enough.
A spokesperson for the company says its emerging markets ETF was one of the industry’s most successful launches of 2016. “In less than a year, we have launched seven active and strategic beta ETFs in the US, and are actively assessing the best approach for expanding into new international markets in the year ahead.”
As well as structural changes in the asset management industry, another challenge is the importance of Franklin’s flagship funds: about 30 per cent of the company’s assets are in just two strategies, including one that is overseen by Mr Hasenstab.
“Talk about key-man risk. If Hasenstab were to leave, that would be a bad day for [the] stock,” Mr Harris says.
The analyst says the biggest risk for Franklin is the “sustainability of performance”. “If performance takes a turn for the worse, then outflows will pick up again.”
A spokesperson for the company says: “We remain confident in the [company’s] future prospects and continue to execute the sound, long-term investment approach that has served the business well for the past 70 years.”
On an earnings call in January, Mr Johnson again struck an optimistic note.
“Although we continue to experience outflows, I believe we are much better positioned to outperform in this environment and we are seeing some early signs of flow improvement,” he said.