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Morningstar | Market Gains, Improved Flows Lift Franklin's 2Q Results Above Our Expectations

While there was little in narrow-moat-rated Franklin Resources' fiscal second-quarter results that would alter our long-term view of the firm, we are likely to increase our fair value estimate slightly to reflect a somewhat stronger March quarter than we projected. The company closed out its second quarter with $712.3 billion in assets under management, up 9.6% sequentially but down 3.4% year over year. Excluding the impact of the Benefit Street Partners acquisition, which added $26.4 billion in U.S. taxable bond AUM during the March quarter, the company's AUM was down 7.0% year over year.

Net new outflows of $9.2 billion for the quarter were $4.0 billion better than our forecast, while total net outflows (which include exchanges and reinvested dividends) of $6.3 billion during the period were only slightly better than our forecast for $7.5 billion in net outflows. Annualized organized growth of negative 3.4% (3.9%) for the March (December) quarter was not only better than results for fiscal 2017 (negative 5.3%) and 2018 (negative 5.0%) but our forecast for negative 4%-6% organic growth during fiscal 2019.

While average AUM declined 8.1% year over year, Franklin posted a 12.0% decline in fiscal first-half revenue due to shifting product mix and ongoing fee compression. Our full-year forecast (which had called for a negative double-digit decline) is likely to come down to a high-single-digit decline, given the easier comparables that Franklin faces over the next couple of quarters. The firm's adjusted half-year operating margins of 27.8% were down more than 700 basis points year over year, as compensation expenses leapt to 26.9% of revenue (compared with 21.3% in the prior-year period and 22.0% in fiscal 2018) but were basically in line with our expectations for the full year.