On Tuesday, Franklin Resources — the asset management firm behind Franklin Templeton — announced that it planned to acquire Legg Mason in a $4.5 billion deal. But the real get, according to Morningstar analysts, is an affiliate of Legg Mason: bond shop Western Asset Management.
Western Asset, which manages around $460 billion in fixed-income strategies, accounted for 57 percent of Legg Mason’s assets under management at the end of 2019. While acknowledging that Legg Mason’s affiliate structure “has proved problematic in the past,” Morningstar strategist Gregory Warren argued that Western Asset was where “the strength of the deal resides.”
According to an analyst note published by Warren on Tuesday, fixed-income investments will make up roughly 46 percent of the $1.5 trillion Franklin Templeton is expected to manage after the deal closes. Equities will account for about 33 percent of assets, with the rest spread across alternatives, multiasset strategies, and money market funds.
Karin Anderson, Morningstar’s director of North American fixed-income strategies, described the deal in a separate analyst note as a “shift toward fixed income” resulting from Western Asset’s “significant” platform.
“This will significantly expand Franklin’s fixed-income business and give it diversification away from the global macro team’s strategies led by Michael Hasenstab, which account for a large share of Franklin’s current fixed-income platform and have experienced significant outflows recently,” she wrote.
While Franklin Templeton and Legg Mason have not yet shared any details around the consolidation of their fund lineups, Anderson concluded that there is “a good deal of overlap across Franklin and Legg Mason’s fixed-income and equity lineups, for both global and U.S.-focused strategies as well as across the firm’s multi-asset offerings.”
The acquisition follows a handful of other mergers of large asset management firms, including the 2017 consolidations resulting in Janus Henderson Investors and Standard Life Aberdeen. However, Franklin Templeton’s purchase of Legg Mason is the largest deal of its kind within the last few years, according to Anderson.
In his note on Tuesday, Warren wrote that a combination of the two firms “was not even on our radar” before the deal was announced.
“We believed both firms were likely to be acquirers of smaller asset managers as opposed to either one being an acquisition target,” he added.
He wrote that Morningstar expects to see “a fair amount of consolidation” both internally and externally, with managers merging funds within their existing lineups as well as acquiring other firms to increase their scale and breadth of products.
“We had viewed most of the U.S.-based asset managers we cover to be buyers rather than sellers (hence our surprise with Feb. 18’s announced transaction), with the earliest deals focused more on firms looking to fill in product sets or expand their distribution reach,” Warren wrote. “The Franklin-Legg Mason combination has a little bit of both.”