Back to top

Image: Bigstock

High Costs & Low Investment Management Fee Ail Franklin (BEN)

Read MoreHide Full Article

Franklin Resources, Inc. (BEN - Free Report) is bearing the brunt of the ongoing challenging market conditions and a shift in preference toward passive investing. These have affected its assets under management (AUM) balance and, consequently, investment management fees.

Analysts are also not optimistic about the Investment management company’s earnings growth potential. Over the past 30 days, the Zacks Consensus Estimate for BEN’s current-year earnings has been revised marginally lower. Thus, the company currently carries a Zacks Rank #4 (Sell).

In the past six months, shares of BEN have gained 2.4% compared with the industry's 17.3% rise.


Zacks Investment Research
Image Source: Zacks Investment Research


Franklin’s investment management fees are its biggest source of revenues, comprising 82.2% of fiscal 2023 revenues. The metric has witnessed a volatile trend over the years. In fiscal 2020, the company recorded a decline in the metric, while it increased in fiscal 2021 and 2022. Further, in fiscal 2023, the company recorded a decline of 2.5% in the metric.

BEN’s investment management fees depend on the level and relative mix of its AUM, as well as the types of services provided. The company’s AUM is exposed to market fluctuations, foreign-exchange translations, regulatory changes and a sudden slowdown in overall business activities. Going forward, changes in AUM might hurt investment management fees and adversely impact Franklin’s financials. We project total investment management fees to decline 1.9% in fiscal 2024.

An escalating cost base has been concerning for Franklin. Though expenses declined in 2022 on lower sales, distribution and marketing expenses, as well as cost synergy realizations of $300 million from the Legg Mason acquisition, the metric witnessed a compounded annual growth rate (CAGR) of 12.5% over the last four years (ended fiscal 2023).

Any increase in expenses due to inflationary pressures, investment in technological advancements and acquisition of talent is likely to limit bottom-line growth in the upcoming period. We anticipate expenses to rise 1% in fiscal 2024.

The business and regulatory environment in which Franklin operates remains complex, uncertain and subject to change. The company is also subject to numerous regulations by U.S. and non-U.S. regulators that add further complexity to ongoing global compliance operations. Non-compliance with these regulations can lead to penalties and hurt profitability. This, along with the increasing investor preference for lower-fee passively managed products, remains worrisome.

Stocks Worth a Look

A couple of better-ranked stocks from the same space are Prospect Capital (PSEC - Free Report) and Capital Southwest (CSWC - Free Report) .

Prospect Capital currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for fiscal 2024 have been revised 8.1% upward over the past 30 days. In the past three months, PSEC shares have declined 8%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for CSWC have been revised 2.7% upward for fiscal 2024 over the past 30 days. Shares of CSWC have rallied 1.1% in the past three months. Currently, the company carries a Zacks Rank #2 (Buy). 

Published in