Franklin's December AUM Dips

Franklin Resources Inc. ( BEN - Analyst Report ) declared preliminary assets under management (AUM) of $670.3 billion by its subsidiaries for the end of December 2011. The company’s results experienced a decline of 0.8% from $675.8 billion as of November 30, 2011 and marginally down from $670.7 billion as of December 31, 2010.

Month-end total equity assets came in at $270.2 billion, down 1.5% sequentially and 8.7% year over year basis. Of the total equity assets, roughly 72% were from international sources, while the remaining 28% were from the U.S.

Total fixed income assets were $297.7 billion, down 0.7% from $299.8 billion as of November 30, 2011, but up 13.6% from $262.0 billion as of December 31, 2010. Of the total, tax-free assets accounted for only 25%, while the rest 75% were taxable.

Franklin recorded $96.4 billion in hybrid assets, up 1.9% from $94.6 billion as of November 30, 2011, but down 9.1% from $106.1 billion as of December 31, 2010. Cash management funds as reported were $6.0 billion, down from $7.2 billion recorded in November 2011 and $6.5 billion as of December 2010.

On a quarterly basis, as of September 30, 2011, total AUM was $659.9 billion, down from $734.2 billion as of June 30, 2011, attributed to market depreciation. AUM inched up 2% year over year, mainly driven by net new flows and acquisitions, partially offset by market depreciation. Simple monthly average AUM during the quarter decreased 2.0% sequentially and increased 18.0% year over year to $714.4 billion. At the end of the quarter, net new flows were $3.1 billion versus $21.7 billion in the prior quarter and $19.4 billion in the prior-year quarter.

Earnings Recap

Franklin’s fourth-quarter 2011 earnings of $1.88 per share were below the Zacks Consensus Estimate of $1.99 per share. Results were affected by higher operating expenses and lower AUM. Moreover, the results lagged earnings of $2.26 per share in the prior quarter, but were ahead of earnings of $1.65 per share in the prior-year quarter.

For fiscal 2011, earnings per share were $8.62 versus $6.33 in the prior year. However, earnings lagged the Zacks Consensus Estimate by 3 cents per share.

Our Take

Among Franklin’s peers-Invesco Ltd. ( IVZ - Analyst Report ) is expected to report month-end AUM for the month of December 2011, later this week.

During the course of calendar year 2011, the company entered into a new strategic relationship with (Telegis) Capital Management, acquiring a 20% equity stake. This company’s experience in commodities, managed futures, and hedge fund replication, ideally balances the existing alternative offerings of Franklin.

Furthermore, in January 2011, Franklin completed the acquisition of a UK equity specialist, Rensburg Fund Management with about $1.5 billion in AUM. The Rensburg acquisition facilitated the company to diversify its product offerings in key markets.

Moreover, Franklin’s acquisition of Balanced Equity Management in July 2011 aims to mark its presence in the Australian market by providing best investment options to satisfy local investors' needs. Therefore, we expect Franklin to benefit from the growth potential of these transactions.

Franklin's global footprint is an exceptionally favorable strategic point, since its AUM is well diversified. Moreover, a strong balance sheet and recently completed acquisitions are expected to strengthen the financials of the company, going forward. However, the regulatory restrictions could mar the AUM growth while increasing its costs.

Franklincurrently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.