Morningstar | 4Q Market Sell-Off and Outflows Mar Franklin's Fiscal 1Q Results; No Change to FVE
There was little in narrow-moat-rated Franklin Resources' fiscal first-quarter results that would alter our long-term view of the firm. We are leaving our $32 per share fair value estimate in place. The company closed out the December quarter with $649.9 billion in AUM, down 9.4% sequentially and 13.8% on a year-over-year basis. Net new outflows of $20.7 billion were close to $5 billion better than our forecast for the company's fiscal first quarter, while total net outflows (which include exchanges and reinvested dividends) of $7.3 billion during the period were far better than our forecast for $20.9 billion in net outflows. Annualized organized growth of negative 3.9% for the December quarter was better than results for fiscal 2017 (negative 5.3%) and 2018 (negative 5.0%), but there is a bit of seasonality in the firm's fiscal first quarter, so we're sticking with our forecast for negative 4%-6% organic growth for fiscal 2019.While average AUM declined 9.2% year over year, Franklin posted a 12.6% decline in fiscal first-quarter revenue, with most of the difference the result of shifting product mix and ongoing fee compression. Our full-year forecast continues to call for a low-double-digit revenue decline, contributing to a negative 3.0% compound annual growth rate for revenue during fiscal 2019-23. As for profitability, the firm's adjusted operating margins of 29.2% were down more than 600 basis points lower year over year, as compensation expenses increased to 25.2% of revenue (compared with 20.6% during the prior year's period and 22.0% during fiscal 2018), in line with our expectations for the full year. With asset managers like Franklin are expected to face not only fee compression but margin compression over the long run (as they have to spend more heavily to improve investment performance and enhance distribution capabilities), we expect operating margins to remain in a 28%-30% range over the next five years (down from 33.5% during fiscal 2018).
Franklin Resources is a holding company that, together with its subsidiaries, operates as Franklin Templeton?. The company is an investment management organization that provides investment management and related services to retail, institutional and investors in jurisdictions worldwide through its investment products. The company's investment products include its sponsored funds, as well as institutional and separate accounts, and sub-advised products. The company's funds include registered and unregistered funds. The company's services include fund administration, sales and distribution, and shareholder servicing. The company also provides sub-advisory services to certain investment products sponsored by other companies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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