When it comes to emerging-markets investing, no fund manager enjoys more widespread name recognition than Mark Mobius, the globe-trotting vice chairman of Franklin Templeton Investments, who commands a team of 31 investment pros stationed around the world, from Rio de Janeiro to Moscow. But Mobiuss brand equity and deep bench were no match for the intensity of the global financial crisis, which sent his groups mostly U.S.-domiciled investors rushing for the exits. When the MSCI Emerging Markets index fell by nearly two thirds from May to October last year, Mobius and his team lost assets at an even faster clip owing to redemptions. Although the index has been rebounding since March, all that hot money has not come rushing back as quickly as it disappeared.
When markets fall we are forced to sell because our clients want their money back, notes Mobius, 73, who helms the Templeton Emerging Markets Group, which manages mostly mutual funds. We were selling in a falling market, which is the worst thing you can do. At the bottom you want to buy, but you dont have the cash.
Such woes stand in stark contrast to the resilience of a small but growing stable of less-well-known emerging-markets businesses nestled within Franklins sprawling empire, which managed a combined $495.7 billion in assets as of the end of August. These nine local fund management firms spread across eight developing markets proved to be far more successful in hanging on to assets through the crisis: From April 2008 to August of this year, when Mobiuss funds under management declined by 37.5 percent, to $25 billion, Franklins local emerging-markets assets rose by 6.4 percent, to $19.2 billion.
The key difference is that these local managers invest in domestic markets mostly for local retail investors, who are much more accustomed to the volatility of their home markets than are U.S.-based investors. As a result, local investors are far less apt to hit the panic button when equities crater.
Franklin does not break out revenue or profits for its local emerging-markets managers, which oversee only about 4 percent of total assets. They are a small part of an overall money management business that raked in more than $1 billion in revenue in the fiscal third quarter ended June 30. Still, William Blair & Co. securities analyst D.J. Neiman estimates that these businesses rank among its most profitable assets, representing the equivalent of about 15 percent of the firms overall operating earnings. Thats because about 75 percent of the local assets are invested in high-fee-earning, actively managed equity funds, versus 46.5 percent for Franklin as a whole, and they tend to deliver higher margins than comparable offerings for U.S.-domiciled investors. Franklin further reduces costs and polices its conservative investment posture by integrating its local managers into firmwide risk management and trading platforms.
You cannot be a premier global asset management firm unless you can build a [local manager] capability, Franklin Templetons 48-year-old CEO, Gregory Johnson, tells Institutional Investor. That is how we differ as an organization.
Franklins network of local managers is valuable in other ways. It enables the firm to repackage products that are successful in one domestic market so they can be sold in another. Franklin is also creating new products composed of multiple local managers for global investors seeking new ways to achieve international diversification. Its an incubator system for good ideas, explains Stephen Dover, the firms international chief investment officer, who oversees asset managers in a variety of emerging markets, including Brazil, China, India, South Korea, the United Arab Emirates and Vietnam.
A case in point is the Franklin Templeton World Perspectives Fund, which manages $26.3 million in assets. The fund features nine separate sleeves of assets that are overseen by several managers, including those on the ground in Dubai, Mumbai, São Paulo and Seoul, as well as Toronto and Tokyo, where Franklin also owns local managers. From its inception last October through August 31 of this year, the fund returned 21.4 percent to investors.
Franklins CEO has been moving fast to expand his reach. Last year, Johnson bought a 49 percent stake in Hanoi-based Vietcombank Fund Management, which is readying a new infrastructure fund for launch later this year that will invest in Vietnams roads and energy sector. In February he launched new local businesses in Malaysia and Mexico. And in March the CEO raised Franklins 25 percent stake in Algebra Capital, a badly beaten up Dubai-based money manager, to 40 percent.
Also on Johnsons planned acquisitions list: adding more managers in Brazil, India, Poland, Russia, South Korea and Turkey countries with large populations, growing middle classes and high savings rate.
Unlike many of its money management rivals, Franklin has been merely stirred by the global financial crisis, not shaken to its core. Although its revenue and profit plummeted as assets under management dropped by $210.2 billion, or 35 percent, from February 28, 2008, to March 31 of this year, they have since bounced back as markets have begun recovering. In the quarter ended in June, assets leaped by 15 percent from the previous quarter and net income surged 169 percent, to nearly $300 million.
With almost $5 billion in cash on hand for future acquisitions, Franklin can afford to be opportunistic as it grows its local presence in leading emerging markets. The firm still generates a huge amount of free cash flow and earnings, observes Keefe, Bruyette & Woods securities analyst Robert Lee, who covers money managers. They have an extremely strong balance sheet. That allows the firm to invest in the companies they acquire, whereas competitors may be more constrained.
Franklin Templeton Investments was founded in 1947 by Rupert Johnson Sr. as Franklin Distributors. The following year Johnson launched an equity and fixed-income fund, the Franklin Custodian Fund. A decade later his second-oldest son, Charles, took over as CEO and, in 1971, took the company public as Franklin Resources, raising enough capital to buy municipal bond manager Winfield & Co. in San Mateo and move Franklins headquarters there.
The money manager grew rapidly, as retail and institutional investors poured money into landmark offerings like the countrys first double-tax-free income fund and the first allGinnie Mae fund. Assets skyrocketed from $500 million in 1980 to $57 billion in 1991. Franklin expanded into new asset classes as it grew through acquisition, buying emerging-markets institutional equity manager Templeton, Galbraith & Hansberger in 1992, U.S. equity fund manager Mutual Series in 1996, wealth manager Fiduciary Trust in 2001 and global private equity manager Darby Overseas Investments in 2003.
Local managers have long been a keystone of the firms global growth strategy. Charlie Johnson began germinating the idea in the 1980s and set out to establish a presence in countries with deep pools of savings, nascent mutual fund industries and the potential for fast-growing revenue streams countries where, in many cases, individuals werent yet permitted to invest abroad. By managing assets locally, he believed, Franklin could gain access to this capital while leveraging its inherent advantage over homegrown rivals: strong brand recognition and the backing of a global institution.
Johnsons first attempt was in Taiwan, where Franklin launched a firm in 1986 that distributed mutual funds managed in the U.S. But the operation never took off, explains Johnson, who today serves as Franklins chairman, because he lacked local business contacts.
Then another route emerged. In 1992 now-deceased emerging-markets investor Sir John Templeton put his legendary Nassau-based firm up for sale. Charlie pounced, paying $913 million. Templeton had the research offices and the relationships to build out our vision of local asset management, notes Greg Johnson, who at the time was coportfolio manager of the Franklin Utilities Fund and vice president of marketing.
Without delay the Johnsons started working Templetons global contacts to open doors at local asset managers that fit with Franklins conservative investment culture. In 1995, Franklin secured a license in India and formed a joint venture with local manager Hathaway Investments called Franklin Templeton Asset Management (India) in which it held 75 percent. In 2002 that venture purchased Pioneer ITI AMC, a small fund manager that was owned by Unicredito Italiano. The operations name was changed to Franklin Templeton India AMC, and it now manages $7 billion in growth and value equity strategies, mostly in mutual funds for local investors.
The Johnsons next strike was in Seoul, but it was ill-timed. In 1997, Franklin bought a local firm just before the Asian financial crisis wiped out about 90 percent of the value of several Asian currencies, including the won. The firm was badly hurt but survived. Today its called Franklin Templeton Investment Trust Management Korea and oversees $3.2 billion in assets and it ranks as the countrys third-largest money manager.
Elsewhere in Asia, Franklin formed a joint venture with Chinas Sealand Securities Co. in 2003 and gradually raised its stake in the operation, called Franklin Templeton Sealand Fund Management Co., to the maximum allowable 49 percent. Today that company manages $3.5 billion in domestic A-share equity assets. In 2007, Franklin struck again on the Chinese mainland, buying a minority stake in a new asset manager that it formed with two units of insurance company China Life Group, called China Life Franklin Asset Management Co., which now runs about $3.5 billion for Chinese institutional investors.
That same year, Franklin set its sights on the Americas, forming a wholly owned subsidiary in São Paulo called Templeton do Brasil, which manages $700 million. That enabled the firm to establish a new beachhead in Latin Americas biggest economy after an earlier joint venture with local fund manager Bradesco came to an end when it bought out Franklins share.
The money managers foray into the Middle East has been less successful. With the Dubai Financial Market general index down by 62.4 percent from June 2008 to September 10 of this year, underperforming all other emerging markets, Algebra Capitals asset base was hit hard, declining by 80 percent from April 2008 through August and catching the firm off guard. Franklin increased its stake to help shore up the firm, but its a calculated risk: Algebras home base of Dubai, in the UAE, has wide-open markets and attracts capital from around the region and these investors proved to be skittish.
Franklins other local managers are thriving, however, and in many cases are notching better returns than other Mobius-managed products investing in some of the same countries (for more on Mobius, see "Hard Times Humble the Eminence Grise of Emerging Markets"). On an asset-weighted basis, for example, 91 percent of Franklins local funds in Brazil, India and South Korea were in the top two quartiles versus peers in the 12 months ended July 31. Part of the success formula is that international CIO Dover and his boss, William Yun, who heads up the asset managers alternative-strategies group, where Franklins local businesses are housed, leave day-to-day investment decision-making to the local investment teams.
In India, for example, Franklins money manager departs from the classic value strategy that otherwise defines the firms investment philosophy and provides local investors with access to the growth plays at the heart of Indias economic story. Today the manager ranks seventh on the India 20, IIs annual list of the countrys biggest managers.
One standout offering is the Franklin India Flexi Cap Fund, which invests in value and growth stocks and has had strong weightings in financial services and technology companies. The fund has delivered an annualized return of 22.4 percent since its launch in March 2005, nearly double the growth rate of its domestic equity benchmark, the S&P/CNX 500 index.
Although the Indian market plummeted last year, losing some 60 percent, Franklins local investors largely stayed put. Assets fell with the index, but then jumped as the market recovered up by 87.6 percent from March 9 to September 11 this year. Although they have not recovered to precrisis levels, the firm is pleased with the result. Our assets are as sticky as you can get, says Sukumar Rajah, the firms CIO for equities. I have not seen any panic redemptions in 15 years.
In China stricter government regulations mean that Franklins local asset management strategy is less advanced. But longer-term performance there has been reasonably solid too. One offering, the Franklin Templeton Sealand Flexible Capital Fund, a $782 million retail mutual fund that invests domestically, beat 95 percent of comparable China equity funds in the three years ended August 31, when it delivered an average annualized return of 41.9 percent. More recently, though, as the Shanghai Composite index dropped more than 50 percent from its peak, the fund underperformed its peer group.
Nonetheless, the assets managed by Franklins two local Chinese managers have proved sticky. Despite massive volatility in the local market, those managers have remained surprisingly immune to outflows and have even added assets, notes Guang Yang, a Chinese-born veteran Templeton portfolio manager who oversees the two managers from an office in Hong Kong. Franklin Templeton Sealand Fund Management Co. added roughly $500 million in assets from April 2008 to August of this year. China Life Franklin Asset Management Co. added $1.5 billion in new money.
You have some smart institutional investors who started to buy in, explains Yang.
A key benefit of running local emerging-markets businesses is the ample opportunity for cross-pollinating successful products. In Brazil, for example, Templetons local manager has developed a series of funds that invest 80 percent of their assets in different sectors of the local economy and reserve 20 percent of their assets for foreign investments. These multimercado funds, as they are known locally, feature strong risk management and enable a portfolio manager to move in and out of different sectors. Their launch was a response to Brazils history of hyperinflation, which ran at a clip of about 1,000 percent a year through the 1980s.
Now, with much of the global economy still in disarray, Franklin is preparing to sell the same types of funds in other markets. These new offerings will follow several other cross-selling initiatives that are already under way: Franklins new Mexico operation, for instance, already offers three Luxembourg-registered funds of funds that draw in part on local managers. And its South Korean fund manager sells a product providing exposure to its local manager in Brazil.
Looking ahead, Franklin hopes to leverage its growing stable of local managers to make meaningful inroads into the institutional business. That effort has a long way to go after all, about 70 percent of Franklins local assets are composed of retail money. But the father-and-son team at the helm of the storied asset manager is squarely focused on the long term. Says chief investment officer Dover, who has worked for the duo for more than a decade: Greg and Charlie Johnson are aware that something that is not particularly big now can be very big in the future.