Franklin Resources (NYSE:BEN) Need to Rotate to Equities

Franklin Resources (NYSE:BEN) has scored big gains in market share, and if they want to retain the share they need to rotate their assets en masse to equities, says Ticonderoga.

Ticonderoga said, "Fixed Income AUM Likely Outperforming Eaton Vance (NYSE:EV) and Legg Mason (NYSE:LM) This Quarter. Through last night, we estimate that BEN's fixed income AUM is up 1.3% for the calendar quarter. We estimate that EV's fixed income AUM is down 4.5% from the beginning of November through yesterday and that LM's fixed income AUM is down 4.7% for the three-month period. Fixed income is a bigger piece of AUM for LM than any other manager (54%), while EV has roughly 30% of AUM in fixed income. BEN is in between at 40%.

"BEN Has Gained Tremendous Market Share, So It Has Better Chance of Retaining Assets If They Rotate en Masse to Equities. BEN's AUM market share among EV, LM, T.Rowe Price (Nasdaq:TROW), and Janus (NYSE:JNS) was 24.5% at 3/09 and 31% at the end of 9/10. Accordingly, BEN is likely in a better position than most to capture internal equity flows via exchanges because it already has the assets.

"BEN Did Quite Well the Last Time Equities “Flowed.” A big misconception, in our view, is that BEN is not levered to equities. At the end of November, 43% of BEN's AUM was in equities. More important, a look back at recent robust periods for equities supports the company's leverage. From 2005 through 2007, industry equity mutual funds totaled $389bn. BEN's equity mutual funds from 12/31/2004 through 12/30/2007 were $63 billion, or an organic growth rate of 31.7%. This compares to TROW's growth of 31.1% and JNS's at negative 24%. We use TROW and JNS because they are generally perceived as the best plays on equities. Note that for TROW, we exclude separate account flows, so it is likely that its total equity growth rate over the period was better than BEN's."

Ticonderoga maintains a "Buy" rating on Franklin Resources, which is trading at $110.92, down $0.98, or 0.88 percent, as of 12:26 PM EST.