Franklin's Investors Pull Out As Its Overseas Funds Falter

Investors have been cashing out of Franklin Templeton Group's mutual funds.

Much of the problem is that 40% of the funds' assets are in international funds-a market segment particularly hard-hit over the past year.

Redemptions of Franklin funds outweighed sales for the first time in July, by $132 million, according to Financial Research Corp. The trend continued in August, the Boston research firm said, but it did not release figures for that month.

Franklin Templeton executives said they are not alarmed by the trend and do not plan major changes.

"In any given year we may lag, based on what's popular," said Peter Jones, executive vice president at Franklin Templeton Distributors in San Mateo, Calif.

But the company's diversity of asset classes will pay off in the long run, he said. Thirty percent of Franklin's assets are in fixed-income funds and 30% are in domestic equity funds.

Meanwhile, however, investors are fleeing from many of the funds offered by the company, which was the second-largest seller through banks last year.

"I think you can directly link that to the performance of the funds," said Neil Bathon, president of Financial Research Corp., Boston.

Another reason for the redemptions appears to be that Michael Price, the star manager of the company's Mutual Series fund family, has announced he will pull back from day-to-day management at the end of the year.

Ed Hipp, president of the brokerage at Centura Bancorp, Rocky Mount, N.C., said his brokers are urging clients to stay in Franklin funds and even buy more.

"People still need exposure to international markets," he said. "If you're investing for the long term, this is the time to be buying rather than selling."

Curt Anderson, president of the retail brokerage at Busey Bank, Urbana, Ill., said his advisers have told clients to ride out the storm.

Investors are heeding the advice. Virtually none have redeemed their equity fund shares, including the $15 million or so of assets in Franklin funds. Mr. Anderson said he owns Franklin international funds himself and feels most of the bad news has passed.

"I think probably the worst of it is over," he said.

Among the Franklin funds that have had large outflows is the $15.3 billion Templeton Foreign Fund, which had net redemptions of $270 million in July after having more than $200 million of net inflows in December, according to Financial Research.

Templeton Growth, a $14.8 billion-asset fund, had net redemptions in July of $30 million, compared with about $200 million of net inflows in December.

But domestic funds have suffered as well. Mutual Shares, the $10.8 billion flagship fund of Mr. Price's Mutual Series, posted a net outflow of $114 million in July, compared with $150 million of net sales in December.

Investors with that fund's class Z shares-those who owned shares before 1996, when Franklin bought Mr. Price's company-had net redemptions of $180 million in July.

A Franklin spokeswoman said that figure is skewed because Z shares are not open to new investors, meaning there are no inflows to balance those redemptions.

And the spokeswoman said that the entire fund industry has taken its lumps lately, pointing to reports that investors in August pulled out $9 billion more from stock mutual funds than they put in.

Nonetheless, redemptions and poor performance have led to particularly slow asset growth at Franklin over the 12 months ending July 31.

During that time the company's assets in its long-term, open-ended funds grew 8%, to $170 billion. Putnam Investments and OppenheimerFunds, by comparison, each saw their assets under management grow 24% over the same period. Putnam now has $176 billion in its funds, and Oppenheimer has $64 billion. AIM Management Group's assets rose 12% over the 12 months, leaving it with $76 billion.

Franklin declined to give sales figures and would not say how redemptions at banks compare with redemptions through other channels.

Mr. Jones said that the company has plenty of cash with which to pay investors who redeem their shares, and that it has not been forced to sell off holdings to pay for redemptions.

One industry watcher said Franklin could balance the hits its international funds are taking by buying a well-known firm or by hiring marquee money managers to attract investors.

"They really don't have a recognized domestic equity capability" in growth-style investing, said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I.

Franklin went the acquisition route in 1992 when it bought Templeton Galbraith & Hansberger Inc., a renowned international fund company, and made another high-profile purchase in 1996, when it snared the distinguished domestic value-investing firm Heine Securities, Mr. Price's firm.

Before those acquisitions, Franklin was widely known as a fixed-income shop, a perception that still overshadows its growth-style equity investing ability, Mr. Bobroff said.

Mr. Jones said that another acquisition is not in the works, but that the company would not rule it out.

If Franklin decides to simply stay the course, its assets will probably grow, just not very fast, Mr. Bobroff said.

Mr. Bathon was more sanguine.

"I wouldn't get too excited," he said. "They have so many products that they've given themselves a reasonable chance of having something else pop up and reestablish their momentum."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER