Franklin Resources Inc. is one of the “best-positioned asset managers in this environment” of expected 12(b)-1 fee reform, according to a stock report issued by FBR Capital Markets.
Franklin's flexible balance sheet — with $3.9 billion in cash and a recent history of paying out 107% of trailing 12-month earnings in dividends and buybacks — along with the firm's strong global-fixed-income offerings, should help it continue to grow in coming months, according to the report, issued Sept. 27.
As a result of all of these factors, FBR has upgraded Franklin's stock to “outperform” from “market perform” and raised the 12-month price target from $105 to $127.
On Sept. 9, Franklin reported a 7% increase in fixed-income assets under management and a 10% jump in global fixed-income assets under management.
“Strong fixed-income earnings should help soften the impact of still-difficult equity markets,” the report said. “Nevertheless, we would also expect Franklin to participate in a broad-based equity market recovery, given its diverse domestic and international offering and strong distribution network.”
And while some analysts have speculated that the Securities and Exchange Commission's plans to reform 12(b)-1 fees could negatively affect publicly traded mutual fund firms such as Franklin, Matt Snowling and Michael Tarkan, the analysts who wrote the report, disagree.
Under the SEC proposal, firms would be allowed to charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed a continuing sales charge, which would be limited to the highest fee charged by the fund for shares that don't have such a charge.
For fund companies, that could mean finding another way to pay distributors, experts have said.
Franklin has $72 billion in assets in share classes with 12(b)-1 fees above 0.25%, according to the FBR report. But 30% of those assets are already in A shares, with an average 12(b)-1 fee of 0.29%.
The four-basis-point cut in that fee as a result of the new rule, if it is enacted, would result in an impact of $8.7 million annually, according to FBR.
The remaining $51 billion is in deferred-load or level-load shares where the average 12(b)-1 fee is 0.74%. FBR estimates that it would take 9.9 years before the investor pays enough in fees for the cap to take effect and thus earnings potentially get hit if at all.
“A lot of our competitors have been out with reports recently saying how bad this (12(b)-1 reform proposal) is for the industry when looking at all the assets at risk,” Mr. Snowling said.
“I don't think they were drilling down on those numbers. Yes there are trillions of dollars in assets subject to a 12(b)-1 cap, but the way it is structures most of the assets won't hit the cap,” Mr. Snowling said.
Overall, he thinks that the 12(b)-1 reform proposal will have very little effect on publicly traded load fund companies.
“I think there (are) going to be certain funds that will have ore exposure than others, but I think the majority of them are going to be fine,” Mr. Snowling said.
Jessica Toonkel is a reporter at InvestmentNews, a sister publication of Pensions & Investments.