Morningstar | Outflows Mar Franklin's Fiscal 4Q Results; Benefit Street Partners Deal to Offset Future Redemptions
There was little in narrow-moat-rated Franklin Resources' fiscal fourth-quarter results that would alter our long-term view of the firm. We are retaining our $37 per share fair value estimate. The company closed out the September quarter with $717.1 billion in AUM, down 1.0% sequentially and 4.8% year over year. Having posted its lowest level of outflows ($2.3 billion) since the September quarter of fiscal 2014 during the first quarter of fiscal 2018, the company's $10.0 billion, $12.1 billion, and $13.6 billion outflows during the March, June, and September quarters, respectively, have been a huge setback.Organic growth of negative 5.0% during fiscal 2018 followed on negative 5.3% organic growth during fiscal 2017 but was still better than the negative 11.8% figure Franklin put up during fiscal 2016. Despite the trend of gradually improving outflows, with this past year's $38.0 billion of net redemptions being better than fiscal 2017's $38.6 billion, we are now forecasting a negative 5.9% CAGR for organic AUM growth for stand-alone Franklin during fiscal 2018-22 (a period that includes a bear market in equities). However, the addition of Benefit Street Partners, a leading alternative credit manager with $26.2 billion in AUM, in fiscal 2019 should be additive to AUM growth in the near term.
While average AUM declined 2.4% year over year, Franklin posted a 5.5% decline in fiscal fourth-quarter revenue, with most of the difference resulting from shifting product mix and ongoing fee compression. Full-year top-line growth of negative 1.1% was in line with our forecast for revenue growth to be flat to down slightly during fiscal 2018. As for profitability, the firm's full-year adjusted operating margins of 33.5% were 190 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.
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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