EUR 850.00 For Business Accounts Only

Morningstar | Franklin's Outflows Ramp Up Again in 3Q; No Change to $41 FVE

There was little in wide-moat Franklin Resources' fiscal third-quarter results that would alter our long-term view of the firm. We are leaving our $41 fair value estimate in place. The company closed the June quarter with $724.1 billion in assets under management, down 1.8% sequentially and 2.5% year over year. Having come off a solid fiscal first quarter, where Franklin posted its lowest level of outflows ($2.3 billion) since the September quarter of fiscal 2014, the company's $10.0 billion and $12.1 billion in outflows during the March and June quarters, respectively, have been a setback.

The firm continues to have a weak spot in its global/international equity platform, which reported outflows of $7.3 billion on weaker long-term fund performance, with just 26%, 23%, 36%, and 47% of funds in their top two peer group quartiles on a 1-, 3-, 5-, and 10-year basis at the end of the firm's fiscal third quarter. While the company's global/international fixed-income operations had seen a return to positive flows the previous four quarters, it was only a matter of time before weakening investment performance returned the group to outflows (which hit $1.9 billion during the June quarter).

While average AUM decreased just 1.4% year over year, Franklin posted a 3.4% decline in third-quarter revenue, with most of the difference due to shifting product mix and ongoing fee compression, which was actually modest during the period. Year-to-date top-line growth of 0.3% was in line with our forecast for flattish revenue growth this year. Operating margins of 34.2% through the first nine months of fiscal 2018 were about 150 basis points lower year over year, as expenses grew at a much faster rate than revenue. Given the constraints we envision for Franklin's top line in the near term, we do not expect much in the way of margin improvement.