Franklin TempletonBEN

, one of the world’s largest investment management firms, is scrambling to stem a massive client exodus and restore investor confidence. Yet, its Western Asset Management (WAMCO) division is making it harder to convince shareholders to stick with the company.

Bleeding Benjamins: Since 2014, Franklin’s shares have plunged 60%, sharply underperforming the market. With about one-third of its assets in fixed income, investors expected the company to benefit from a shift into bonds as the Federal Reserve cut interest rates. Instead, it has faced unprecedented withdrawals, particularly from its WAMCO division, which has been burning cash and rapidly losing clients.

• Institutional account holders like the Ohio Bureau of Workers’ Compensation and the Chicago Teachers’ Pension Fund have withdrawn $750M and $568.5M, respectively, opening the door for competitors such as Pimco, DoubleLine, and Capital Group.
• These outflows come on the heels of Franklin’s first quarterly loss since 2017, driven by a $400M write-down linked to lower projected WAMCO earnings.

Writing On The Wall

After acquiring WAMCO through its 2020 purchase of Legg Mason, Franklin allowed the division to operate independently. Now, the company is reconsidering this setup due to the division’s asset losses and investigations into alleged illegal activity by star fund manager Ken Leech. The Department of Justice, SEC, and newly disclosed Commodity Futures Trading Commission are investigating ~17K trades made by Leech —triggering several leadership changes, including Leech taking a leave of absence, which has further eroded client confidence and worsened  WAMCO’s struggles.

• Since August, Franklin has reported its largest-ever quarterly outflow, with $55B withdrawn from WAMCO, representing a whopping 15% of its assets.
• UBS analyst Brennan Hawken remarked, “Western is toast. There’s no question [Franklin] has buyer’s remorse. But there’s nothing they can do about it” (FT).

Silver lining search: While Franklin Templeton is attempting to win back clients by aggressively expanding its digital and international footprint in the UAE and emerging markets, progress has been slow. Addressing stakeholder concerns, the investment firm’s CEO Jenny Johnson emphasized that WAMCO accounts for just 10% of the company’s revenues, stating, “We have a lot of different brands under Franklin Templeton and outside of Western, we’re actually in positive flows through the rest of our business.”