Franklin's lesson: Managing funds vs. ETFs

Franklin Resources misses EPS estimates by 9 cents.

By InvestorPlace Oct 28, 2010 12:50PM

By Jon Ogg

Exchange traded funds like Franklin Resources have become quite popular during times when the market is volatile.

Franklin Resources (BEN), home of the Franklin Templeton funds, is taking it on the chin this morning as the earnings were lighter than estimates. Earnings came in at $1.65 EPS vs. Thomson Reuters $1.74 EPS. Despite a +23% revenue gain to $1.53 billion, analysts were expecting $1.56 billion.

Total assets under management grew to $644.9 billion at Sept. 30, 2010, versus $570.5 billion as of June 30, 2010 and versus $523.4 billion a year ago at Sept. 30, 2009.  Equity assets comprised 43% of total assets under management, fixed-income assets comprised 39%, and "hybrid and other assets" accounted for 18% of total managed assets.  Operating income for the quarter ended Sept. 30, 2010 was $509.0 million, as compared to $521.6 million for the prior quarter and $384.7 million for the quarter ended Sept. 30, 2009.

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What is interesting is not so much the earnings, but the reaction and even more so the implications. Shares are down -3.1% at $112.43 this morning and it only took about 90 minutes for a full day's average trading volume to be hit.    The implication is worth a note, because Franklin effectively has no exchange-traded funds business as it is all a managed funds operation.

Most ETFs tend to have lower management fees than their open-end mutual fund counterparts.  Investors have been flocking to exchange traded funds and bonds rather than the old-school mutual funds.  As ETFs trade throughout the day and can be bought for next to nothing in commissions, they are often a preference over funds that price at the close each day.  Some echange traded fundss are even commission-free at some discount brokers on some ETFs.

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There are some obvious risks for a mutual fund family to open ETFs over their traditional open-ended mutual funds.  The lower fees generated is one concern, but then there is the doubling effect that some fund clients could roll out of the traditional funds and into the lower fee ETF products.  While the firm would lose the assets under both scenarios, there is a chance that a firm could expedite that move into an exodus.

Vanguard's John Bogle had been a sharp critic of ETF products for some time.  Bogle even went on this “shot-termism” bash.  Still, Vanguard finally launched ETF products.  It now lists what looks to be more than 40 ETF products across its asset classes.  ETF products generally have lower management fees than 5-letter open-end mutual fund tickers from A, B, and C shares.

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Franklin's CEO Greg Johnson was quoted over the summer saying that Franklin has no plans to launch ETF products despite ETF assets growing at faster rates than traditional mutual funds.  Either the expenses came in more than expected or the revenues from operations were not up to snuff.  Maybe Franklin will want to reconsider its ETF stance if this trend continues in the quarters ahead.

For more ETF research and ETF information, follow these links.

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