Local talent meets global gurus

The expertise of investment gurus Mark Mobius and Michael Hastenstab gave US group Franklin Templeton a platform for expansion, which has included a key UK acquisition

Cherry Reynard 160 byline 2012

Franklin Templeton is the product of two iconic investment names: Rupert H Johnson and Sir John Templeton. Johnson espoused values of conservatism and prudence when founding Franklin Distributors in 1947, while Templeton has often been seen as the architect of value investing and a pioneer in emerging markets. The two groups came together in 1992 and while Templeton died in 2008, the combined group is still run by Rupert H Johnson Jnr.

It has also spawned its own gurus: veteran investor Mark Mobius runs the group’s multi-billion dollar emerging markets franchise, which now has analysts across the global. Bond manager Michael Hastenstab, who began his career with the group, now runs $150bn across a variety of fixed income mandates with a similarly global reach.

These investment ‘brands’ have provided a platform for the group to expand beyond its native US and have been an important part of its global offering. However, the group has also made selective local acquisitions. In the UK, as part of its drive to have ‘local product by a local team for local investors’, it bought Leeds-based boutique Rensburg Fund Management in 2010. Rensburg had a number of quietly impressive fund managers, notably in the small and mid-cap area.

The ex-Rensburg funds now form key part of the group’s UK offering – about two-fifths of the range. Head of UK distribution Ian Wilkins says: “At the time of the acquisition, we had no dedicated UK equity capability. It seemed to be a square peg for a square hole and the group was culturally very successful.”

He says Franklin Templeton aims to leave a business alone once bought – certainly all the existing Rensburg managers remain in place. Wilkins adds: “We will leave the investment teams to do what they do best and we give them the right resources – a 24-hour trading desk, performance attribution.”

Wilkins says the group is prepared to grow the Rensburg business by hiring new managers. “If the right opportunity came along, we would invest to grow. We have no commitments yet, but if the opportunity was there, we would certainly strengthen the team.” The group also does not rule out another acquisition. It is cash-rich – with about $9.5bn on the balance sheet of the wider company, but Wilkins says it has to be the ‘right thing at the right price’.

The group started in Europe with just its Luxembourg range and had to adapt its tactics in the UK accordingly. Wilkins says: “When we started out, we soon reasoned that we were not going to sell tax-inefficient Sicavs to the local market. We had to find an audience that could buy what we had. We did that and the Sicav became a big seller for us.” He says that more sophisticated UK investors still buy the funds within the Sicav but the launch of the domestic Oeic helped the group build its UK presence.

Focus

The Oeic has changed over time. The group reorganised the fund range in April 2012, closing two of its UK Oeics and merging away two others. It merged the £5m UK Equity fund into the £31m Franklin UK Managers’ Focus fund, managed by the Rensburg team. The £12m Franklin US Equity fund merged into the US Opportunities fund and the Franklin Biotechnology and Global Reits funds closed, though investors can still access the strategies through the Luxembourg Sicav.

Recent product development has largely focused on expanding its existing franchises or acquisitions, rather than bringing in new managers. The group launched an Africa fund for Mobius in September, a Global Allocation fund in 2011 and has extended its fixed income franchise under Hastenstab: “We continue to evaluate the product range for retail investors. we have a few ideas in terms of what we could do next year,” says Wilkins. “Rather than simply launching more me-too products, we want to position ourselves where the market is going rather than replicate the current make-up of the market.” Seeking out external endorsement of its funds – such as ratings from OBSR or Towers Watson – is also a priority.

Wilkins says the group is also looking at the opportunities presented by the RDR. It has had its RDR-friendly share classes in place for some time, but is also looking at areas such as alternatives. It recently took a majority stake in hedge fund firm K2 Advisors Holdings (K2), for example, with an eye to expanding this part of the business.

Wilkins says: “We now have around $15bn in alternatives, including private equity, real estate, hedge funds and it is a space we are committed to. The same is true of multi-asset – which is a $27bn business for us worldwide, but we currently have no multi-asset presence in the UK.”

He adds: “The RDR is disruptive change for the industry. There will be winners and losers. I believe that scale will matter – the market is clearly changing. We have built our advisory business through retail banks, platforms and life companies.” He also says there may be opportunities in restricted advice models and is watching closely to see how the market dynamic moves. As a first step, the group is likely to focus on the local aspect of some of its global strategic partnerships.

The group has three channels – the institutional/consultant side, the retail/discretionary ‘investment led’ side and the advisory side. Unlike many of its peer group that have chosen to build up the institutional channel before the retail and wholesale channels when moving into new markets, Franklin Templeton has an established presence in the retail market and now plans a more concerted push into local government and other institutional areas such as segregated mandates and sub-advised accounts.

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“We have never expanded in an overly aggressive way. We prefer to get engaged and then wait for the opportunities. New markets tend to be driven by existing relationships. We look for two or three big houses to back us and build from there,” says Wilkins

The group’s UK range can be misleading, as many of the group’s assets are housed in its Sicav. For example, the US Opportunities fund is £1.5bn in Luxembourg, but just £20m in the UK. The Global Total Return fund is £17.5bn in Luxembourg, but just £105m in the UK. In the UK, it is the former Rensburg funds that are largest, with the Franklin UK Mid-Cap the largest at £643m.

The Mid-Cap fund, along with the Global Total Return fund, is also the best performing of the group’s range. Darius McDermott, managing director of Chelsea Financial Services, says: “The Franklin UK Mid Cap fund is on the Chelsea Selection buy list. This fund has the most consistent track record of all the mid cap funds and is run by Paul Spencer who is backed by a strong team in Leeds.”

Surprisingly, the Global Emerging Market fund has had a difficult run of form, though the investment trust has better performance. Nevertheless, McDermott is still willing to back Mobius and his team: “Mark Mobius is a legendary emerging market investor and he is head of a very large team of fund managers. They run a number of funds including frontier markets and country specific funds. They have a strong reputation in this area. The only blot on the landscape is this small emerging market unit trust which is in our Redzone. Unfortunately it does not mirror the performance of the very good EM investment trust they run.”

Gavin Haynes, investment director at Whitechurch Securities, likes the group’s Luxembourg-domiciled frontiers fund: “For investors prepared to take a long-term view, some of the smaller less developed emerging markets offer the potential to replicate the growth that has been achieved by some of the larger mature emerging markets over the past decade. Investing early in the development of economies where growth levels are high can provide some exciting returns, although the risk associated are also high. Templeton Frontier Markets is a solid choice to gain diversified exposure to some of these  emerging markets in the early stages of development.”

He adds: “The fund’s outperformance since launch in 2008 has been impressive given the tricky investment climate. Templeton manage over $1bn in frontier markets and the Luxembourg domiciled fund follows the value driven approach favoured by Mobius. Although it is companies not countries that drive the selection criteria, the portfolio is skewed towards Africa, Emerging Europe and the Middle East where Mobius currently sees the most attractive opportunities.”

The group’s classic value strategy – the Templeton Growth fund – has struggled along with other value strategies. Its high weighting to European equities hurt its long-term record, but has helped it deliver strong one-year figures.

McDermott says that Chelsea has a strong and growing relationship with Franklin Templeton. He is increasingly positive on the group’s global bond franchise, saying: “The global bond funds are run by Michael Hasenstab. His team run many billions of dollars in this asset class and he is the one of the few global leaders on this area.”

The group does not reveal where fund flows have been strongest, but Mobius is one of the most well-respected emerging market investors globally and tends to perform better in bull markets, so if there is a re-embracing of risk he may see a resumption in popularity. Equally, Hastenstab’s high alpha, unconstrained approach to global bond investment is likely to prove popular in a climate where conventional government bonds appear to offer little value. Franklin Templeton has chosen its gurus carefully.