BEN - Frankiln Resources Inc.

[LowIQinvestor]

Anyone taken a look? Ticker BEN

 

Serial Stock Cannibal, Large Family ownership (37% insider ownership), occasionally pays a special dividend and pristine balance sheet.

Valued at 7 or 8 times 2015 earnings when factoring in net cash.

 

"Franklin Resources, Inc. is a publicly owned asset management holding company. Through its subsidiaries, the firm provides its services to individuals, institutions, pension plans, trusts, and partnerships. It launches equity, fixed income, balanced, and multi-asset mutual funds through its subsidiaries. The firm invests in the public equity, fixed income, and alternative markets. Franklin Resources, Inc. was founded in 1947 and is based in San Mateo, California."

 

I found this guy's articles interesting on BEN:

http://seekingalpha.com/article/3461426-franklin-resources-and-1-foot-hurdles

 

 

 

 

 

 

[Guest Grey512]

I've looked briefly. It's in the "too hard" pile for me. Reasons:

 

1) Bias against asset managers or any businesses that are 'in the business of valuing other businesses'. (though I do break that rule on occasion, e.g. BRK, Markel, etc)

2) If you look at the proportion of US household wealth invested into things like equities, we are approaching a cyclical high.

3) I fully admit that I am a complete tourist / dilettante on things like macro / top-down calls, I am definitely not super-excited about the Emerging Markets right now and it just somehow felt that Franklin's AuM and performance tracks the fortunes of the EM asset prices.

 

With that, I am on the sidelines. May pick up some in an implosion / repeat of the '08-'09 conditions.

[LowIQinvestor]

With that, I am on the sidelines. May pick up some in an implosion / repeat of the '08-'09 conditions.

 

It appears that BEN is priced as if an implosion in the equity markets already occurred.

I think BEN traded around a 7 PE back in the early 2009 time frame.

 

Clearly, their emerging markets (international) exposure is what everyone is afraid of (in the near term). 

 

Interestingly, Invesco (IVZ) is valued at close to a 14 PE and they seem to be a relevant comp (but more levered balance sheet).

[ccap]

BEN has been on my list to look at.  On the positive side, JPM has them as the industry leader in ROE for asset managers.  On the negative side, there have been articles about asset outflows from their funds.  No clue how bad the problem is.

[LowIQinvestor]

Became a shareholder today:

$38.50/share

$12.50 net cash

$3.7 EPS

 

I was impressed by slide 19 "Operating Leverage

Growing Operating Income Faster than AUM"

http://investors.franklinresources.com/files/doc_financials/quarterly/2015/FranklinResources3Q15.pdf

 

Would be shocked if they weren't buying back stock at at today's price. If I were the Johnson family I would just take it private :)

[benhacker]

I have to say that I think this looks really cheap, but as someone who runs a financial business, and as someone who talks to traditional financial advisors from time to time, I can't really see the appeal of this business *at all*.

 

I mean, traditionally these fund / advisory businesses have been phenomenal (to shareholders) right?  But they have generally sucked for clients.  In the last decade or two, two things have changed:

1) Clients have realized this

2) Clients have a choice

 

With the advent of companies like Betterment, Wealthfront, and the continued dominance of Vanguard (they have a service for 0.3% you can get a robo-advised portfolio *and* have access to talk to a financial advisor as needed... and people (in US at least) almost universally have a high opinion of their ethics, rightfully so IMO), are these Fund complexes in trouble?  It feels like the vanilla fund guys are caught in the middle between indexing and all the Yale / Pension fund idiots overpaying for PE and Hedge Funds, as vanilla management has been squeezed.  I personally think the PE and Hedge Fund guys are next, but I don't think the trend in low cost / quant index is going to change any time soon to benefit BEN / TROW et al.

 

BEN manages like $800B with a weighted average fee of like 1%, and 1/3 of that AUM is bonds... I just can't see a world in which their is $800B of funds staying with BEN with those fees.  They may grow, but fees will shrink...

 

I won't argue that BEN is perhaps so statistically cheap that my commentary above doesn't matter (I would definitely be long rather than short, and I need to really think about it as it's too cheap), but I do feel like asset management as a business is in front of a freight train.

 

Hope my comments are worthwhile, I don't follow the space, but as a small advisor, I see the trends, and I don't see how the big guys who are just buy side / asset managers without serious customer service, survive without performance being front and center.

 

My 2 cents.

[Jurgis]

IMO, active funds are still viable/attractive for:

 

- International. Most indexes suck / it's tough to make a good international index allocation without serious work

- Bonds. AFAIK, bond index funds also suck.

- Non-traditional holdings

 

I don't know what percentage BEN has in the above vs. "just-buy-Vanguard-and-be-done-with-it" USA equity funds.

 

No positions, no opinion, just responding to benhacker above.

 

P.S. benhacker - you should buy BEN just for the pun value. ;)

[Picasso]

Most investors are not directly investing with Franklin, they have some representative directing assets to Franklin for a fee.  So the client is actually paying close to 1.5-2.25% to have assets sit with Franklin or other mutual fund shops.

 

I think it would be a value add if they outperformed (which Franklin has done across several large funds until recently, surprise surprise) but that isn't the case when you have long-term bonds at 2-3%.  I don't see enough returns out there for these guys to justify those fees.  I think thats a big part of the reason why people are focusing so much on the cost side of the equations because it's the one thing an investor can sort of control when they're stuck with few options.

 

On the other hand you can say that people will seek on the Franklin type shops to find the value.  So far they've been unable to execute well in this environment but who knows going forward.

 

Franklin might not lower the fees as much as the fees will get squeezed out of the representative.  Reps could setup 1.5% programs into a mutual fund platform which was very expensive.  Doing that today almost guarantees no returns. 

 

I agree with benhacker on this one.  Just too hard to see past the secular downtrend in this category.

 

If I had to invest in this segment of the market, I'd probably stick with BLK.  Better diversified, not that expensive, large share of the ETF market, etc.  That said, BEN does look optically cheap.

[benhacker]

Good points Picasso. Agree on BLK.

 

Jurgis, I may have to dig a bit more on BEN's aum composition. I don't agree so much that indexing isn't as valid for international, but do agree on bonds...

 

Thx.

[wknecht]

I think these guys have staked a lot on the energy sector, including the debt of some high cost producers. I'm not very familiar with the details but mention it to bring it to the attention of folks that are buying.

[Jurgis]

Jurgis, I may have to dig a bit more on BEN's aum composition. I don't agree so much that indexing isn't as valid for international, but do agree on bonds...

 

This is getting OT fast, but what would you propose as good indexes (and funds using them) for international? From what I've seen Vanguard International has underperformed active international funds (Fido International, I believe) for long time.

 

One issue for international is composition of the index... how do you select countries that go into index? how do you select country percentages in the index? how do you select company representation per country in the index? Do you include or exclude emerging markets? If so, why? And so on. I guess, one "right" way would be to do market cap weighed index of "non-US" companies without doing any kind of country weight adjustments. Not sure if anyone does this. Of course, this runs into issues with China megacaps... and so on.

 

I'd also claim that total global market is not as efficient as US-only. So active manager can shift countries and industries possibly better than US-only manager. Although clearly it's also much more work.

 

I guess I could start a thread in general category on this.

[benhacker]

I guess I could start a thread in general category on this.

 

Could be interesting.

 

I don't have a huge level of insight into your questions, but I do believe that generally a large active manager after costs can't generally make any "alpha" with their insights to your questions either.  International is more complex, more varied, broader, but again, I think that leaves lots of choices for a manager to make and get right... OR WRONG.

 

I'm not a big efficient market guy (obviously) or anything, but I think the belief that foreign markets are more inefficient is probably over-hyped (true, but overhyped)... and it's also offset by the fact that trading in international markets involves higher costs (trading and liquidity).

 

Again, the above comments are directed at a firm like BEN which deals in *Billions* of dollars.  I truly don't think (regardless of history) BEN has better chance of outperforming in those markets.

 

I can almost guarantee without looking that BEN's foreign funds carry higher expenses (both advisory, and admin) and also spend more $$$ as a % of AUM on trading costs.  The benefits if any for international are not given to the client.

 

I guess that is really why I'm bearish on this industry.  A company that creates value (provides something valuable to the client) is the kind you want to own.  I'm hard pressed to find a (large) firm in the AM industry which I think does this.

 

PS - I just looked up EFA (which had high ETF fees from the start, so is a conservative example) - Trailing 10 year returns of 3.42% annually vs. 3.31% for foreign large blend fund (so obviously just a small data point, but I think it lends to my point).  Interesting, SPY did 6.84% vs. 6.92% for category of large blend US.  So not exactly what you would think (data from M*, so perhaps they have a flawed methodology... but they are usually real solid with data)

 

I just think it's brutal to outperform the market with 1-1.5% of fees + 1% of trading costs (check out the fees on some of BEN's international funds!!!!).  I don't care what market you operate in.  I find it brutal to outperform and I'm a small fry.  Maybe I just suck ;-), but I can't imagine running $1B...  Ultra-low turnover, high quality would be the only way to go IMO (that's kind of my style but still...).  I think indexing will go too far some day, but not sure we are close yet.

 

We are way OT... I always enjoy chatting, I'll drop this from here to not pollute the thread.

[LowIQinvestor]

Interesting article in WSJ on BEN:

 

The New Bond Market: How One Manager Doubles Down on Danger

 

http://www.wsj.com/articles/the-new-bond-market-bigger-funds-bring-bigger-risk-1442808002?mod=yahoo_hs

[Jurgis]

Thanks for the article link.

[vinod1]

Took a quick look at some of their largest funds. The expense ratios of these funds are ridiculously high. Sales charges, 12b-1 Fees on bond funds?

 

DOL's upcoming fiduciary standard rules could have a major impact on BEN. So firms such as T Rowe Price could benefit.

 

http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html

 

http://www.dol.gov/featured/ProtectYourSavings/faqs.htm

 

Vinod

 

[Guest Grey512]

IMO, active funds are still viable/attractive for:

 

- International. Most indexes suck / it's tough to make a good international index allocation without serious work

- Bonds. AFAIK, bond index funds also suck.

- Non-traditional holdings

 

I don't know what percentage BEN has in the above vs. "just-buy-Vanguard-and-be-done-with-it" USA equity funds.

 

No positions, no opinion, just responding to benhacker above.

 

P.S. benhacker - you should buy BEN just for the pun value. ;)

 

Why not go with Doubleline or Oaktree. It's somehow my perception that Doubleline and Oaktree work harder for your (or mine) invested money than Franklin does. They satisfy all of the 3 buckets you mentioned above. And they do not 'shoot from the hip' when making non-consensus decisions. Franklin reminds me sometimes of value investors who invested in Corinthian just before it went bust because it was 'too cheap' and that 'the consensus that predicts doom for Corinthian is just wrong'. And those same people are probably long Lifelock..

 

Either way, I think you get my point :) Not sure what Franklin's niche is anymore.

[LowIQinvestor]

Franklin reminds me sometimes of value investors who invested in Corinthian just before it went bust because it was 'too cheap' and that 'the consensus that predicts doom for Corinthian is just wrong'. And those same people are probably long Lifelock..

 

Jurgis, I'm unclear as to what you mean here.

Could you elaborate on the parallels you see between COCO and BEN? I'm not seeing any similarities...

[Guest Grey512]

What I mean is that some Franklin managers piled into unpopular trades such as energy or Ukraine and when those positions moved against them, they dug in and doubled-down. Check out some of the investments Michael Hasenstab has been doing.

 

To reiterate: I am not saying that Franklin = COCO. I am saying that Franklin is like an investor who invested big in COCO. That's the analogy I was going for there.

[Picasso]

The thing with Ukraine was, they bought the bonds at a so-so spread over better quality credits.  When things blew up they lost several multiples of the bond yields within a very short period of time.  I remember looking at that and realizing that big AUM for foreign/bond investors are tricky when you can't properly deploy a lot of capital.  You end up going to places like Ukraine to get your returns right before Russia invades you.

[LowIQinvestor]

Let's assume a 2008 downturn is right around the corner. The stock market is going to fall 50% very soon. What type of earnings can we expect from BEN?

 

As a starting point, one might look at BEN's net income for the TTM ( $2.4B)

Let's cut that income in half to account for a massive market crash. Let's say net income is $1B. Given that the world is ending perhaps we should assign an ultra-low multiple to earnings of say 6.

 

So in this hypothetical situation, BEN is valued at $6B.

Add in the $10B in net cash and you have a $16B market cap.

 

Today's market cap is $23B. So there is about 30% downside if this depression like scenario emerges.

 

 

 

[vinod1]

Let's assume a 2008 downturn is right around the corner. The stock market is going to fall 50% very soon. What type of earnings can we expect from BEN?

 

As a starting point, one might look at BEN's net income for the TTM ( $2.4B)

Let's cut that income in half to account for a massive market crash. Let's say net income is $1B. Given that the world is ending perhaps we should assign an ultra-low multiple to earnings of say 6.

 

So in this hypothetical situation, BEN is valued at $6B.

Add in the $10B in net cash and you have a $16B market cap.

 

Today's market cap is $23B. So there is about 30% downside if this depression like scenario emerges.

 

BEN looks interesting and I taking a closer look.

 

Most of their cash is trapped overseas so it needs be reduced for the tax liabilities if they brought it back.

 

Since the business is not capital intensive and they generate half their earnings overseas, they would continue to generate a ton of cash overseas. How is this going to get to us?

 

M&A seems to be the only avenue.

 

They mentioned that only $1 billion cash in US is really free to be deployed into stock repurchases.

 

Vinod

[Spekulatius]

I think continued shift to lower cost index funds and ETF's is a larger risk than a stock market crash. the numbers don't lie, the lower cost alternatives beat what many fund companies can offer and financial advisers and the managers of pension funds and admins of 401k are noticing and slowly moving assets to these low cost alternatives.

[vinod1]

They have $8.3 billion in cash and $2.2 billion in investments.

 

$5.3 billion of the cash is offshore and $3 billion is in US. Of this cash, $2 billion offshore cash is required to be held for regulatory reasons and similarly about $1 billion in US cash is tied up.

 

That leaves $3.3 billion in offshore cash and $2 billion in US cash.

 

If offshore cash is repatriated then they would need to pay tax. I am not sure about the rate but assuming around 35%, then there is only about $2 billion in offshore cash.

 

Net of $1.4 billion in debt, we have about $2.6 billion in free cash or about $4 per share.

 

Vinod

[vinod1]

I think continued shift to lower cost index funds and ETF's is a larger risk than a stock market crash. the numbers don't lie, the lower cost alternatives beat what many fund companies can offer and financial advisers and the managers of pension funds and admins of 401k are noticing and slowly moving assets to these low cost alternatives.

 

I think there are two trends

 

1. The longer term trend towards indexing as you mention. More and more indexing is also being offered in defined contribution plans and people are moving to indexing partly for the right reasons and partly for the wrong ones.

 

I think active funds would continue to be offered just because there are going to be some people who for various reasons would take an active approach.

 

But the trend towards indexing would be a drag on future AUM growth.

 

2. There is a shorter term cycle of performance chasing also going on. During a broad based bull market, indexing would also have good short term relative performance compared to active funds. I think most people now are moving towards indexing due to this reason, rather than a careful consideration of the reasons why indexing would make sense in the long term.

 

I have friends, some with MBA from top 10 programs, who recently started putting money into index funds paying advisers 0.75% to 1% in annual fees for this recommendation. The reason being index funds generate very good performance.

 

In the next bear market, active funds would likely manage to do slightly better than the index funds (mostly due to structural reasons) and people would then begin to think more favorably of them. Then the cycle would repeat.

 

We are now at a point where both trends are negative for active fund management companies. So BEN which charges higher fees and has less institutional investor base, is going to be more effected and likewise was punished more.

 

It certainly looks cheap but I need to think about this more.

 

Vinod

[LowIQinvestor]

FYI: Franklin Templeton and K2 Advisors Introduce Liquid Alternative Long Short Credit Fund for US Investors

 

http://money.cnn.com/news/newsfeeds/articles/marketwire/1219873.htm