Franklin's Cost Containment Continues, AUM Growth Feeble
Zacks Investment Research | Nov 29, 2016 09:55PM ET
On Nov 26, 2016, we issued an updated research report on global investment management company, Franklin Resources, Inc. (NYSE:BEN) . We remain encouraged by the company’s expense management, strategic acquisitions and robust distribution platforms that aid its growth prospects. However, muted growth in assets under management (AUM) weighing on investment management fees, together with a challenging business and regulatory backdrop remain concerns, going ahead.
Franklin remains focused on expense control with an aim to enhance bottom-line growth. The company recorded a 14% decline in operating expenses in fiscal 2016. Notably, management projects expenses in fiscal 2017 to remain stable or drop slightly, taking into account the impact of previous cost-cutting initiatives.
Franklin remains well positioned to grow organically. The company’s relatively strong distribution platform and ability to be an early entrant in several foreign markets provide it with better opportunities to derive the most from its business.
Moreover, Franklin should benefit over the long term from its increased focus on international markets. Over the last couple of years, the company undertook strategic acquisitions to enhance its foothold in alternative investments and multi-asset solutions platforms.
However, the company’s AUM is exposed to market volatility, regulatory changes and sudden sluggishness in business activities. Fluctuations in AUM can have an adverse impact on the company’s investment management fees as they are based on a percentage of AUM. Notably, these fees are the biggest source of revenue for the company, comprising nearly 68% of its total revenue since the past couple of years. During fiscal 2016, Franklin’s fees declined due to a fall in AUM.
Further, the company is subject to several U.S. and non-U.S. regulations, including the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that are likely to hurt its profitability and operational flexibility. Moreover, the Foreign Account Tax Compliance Act (FATCA) is expected to increase the administrative and compliance costs significantly.
Franklin’s shares have gained over 5% on the NYSE so far this year, significantly outperforming the 1.9% gain of the Zacks categorized Investment Management industry. Further, the Zacks Consensus Estimate for the current year fiscal 2017 has remained stable at $2.66 per share, over the past 30 days.
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