A slow progress to a uk presence

It took Franklin Templeton 12 years to launch a second fund in the UK, but now it has plans to become one of the top 20 retail asset managers in Britain in the next five. By Simon Hildrey.

Franklin Templeton Investments is not an asset manager that likes to rush things. Having launched its first open-ended fund in Britain in 1988, it took another 12 years for its next fund to appear, although the Templeton Emerging Markets investment trust was established in 1989.

The group argues that it prefers to build a sustainable investment process and market position. The America-domiciled Templeton Growth fund, for instance, is 51 years old and has delivered a compound return of 13% a year. Another sign of Franklin Templeton’s longevity is the fact that Mark Mobius is arguably still the best-known fund manager at the group among investors and has run the emerging markets investment trust since launch.

Franklin Templeton, however, is preparing to increase its presence in the UK. It is to expand its Oeic range from the current eight underlying funds and will apply for distributor status for a number of its Luxembourg Sicav funds so British investors can buy them. This is part of its plan to become one of the 20 largest retail asset managers in Britain within the next five years.

The first open-ended launch was the Templeton Growth fund in September 1988 as a mirror of the America-domiciled fund. The next launch was the Franklin Biotechnology fund in July 2000. The retail range was expanded in 2003 with the addition of Franklin Corporate Bond, Franklin Mutual Shares, Franklin US Equity and Templeton Europe. The latest launches were Templeton Global Emerging Markets and Templeton UK Equity in March 2004.

Jamie Hammond, sales and marketing director for Northern Europe at Franklin Templeton, says that since September 2003 the asset manager has increased its share of the British market substantially. “Our market share has risen from 0.02% to 0.8%. According to the Investment Management Association, we have moved up from 112th to 74th in the rankings by market share.”

Franklin Templeton has now accumulated about 252.3m of assets into its Oeic funds. This compares with just 40m two years ago. Hammond says: “We would like to be one of the 20 largest asset management groups in the UK over the next three to five years.”

The next step for the group, says Hammond, is to expand its fund offering in Britain. He says there are two parts to this development. The first is to grow its Oeic range by launching funds in the core sectors that are popular with retail investors. For example, it launched the Templeton UK Equity fund last year after recruiting Martin Cobb from SVM as manager to provide a presence in the UK All Companies sector. Currently, Franklin Templeton does not have a UK equity income fund and only one bond fund, which is fourth-quartile over the past year. The launch of new funds in the Oeic range, adds Hammond, may require the further recruitment of external fund managers.

It is likely that no more than four funds will be added to the Oeic range. The timing of any launches will depend on whether external fund managers will have to be hired or whether Franklin Templeton feels it has the internal capability. If managers do not need to be recruited, it is expected that funds will be launched before the end of this year.

Hammond says the Oeic will be used for the more mass retail market. Thus, the second stage of this development is to seek distributor status for some of its 48 Luxembourg Sicav funds, to make them more tax-friendly for retail investors. According to Hammond, the Sicavs will complement its existing Oeic range rather than duplicate. The group will market more specialist funds in the Sicav range where there is demand from discretionary and multi-managers.

One example is the Global Reits [real estate investment trusts] fund, which will be managed by Jack Foster, senior vice-president of Fiduciary Trust Company International. Franklin Templeton is seeking approval from the Luxembourg authorities to launch this fund and Hammond is confident there will be strong demand for it. Two other examples are the recently launched Templeton Global Income and Templeton Equity Income funds. The Global Income fund combines high-yielding equities and bonds. The equity portion is managed by Jeffrey Everett, chief investment officer of Templeton Global Advisors, while the fixed interest side is managed by Chris Molumphy and Michael Hasenstab. Hammond says it is likely that the Sicavs will be marketed in Britain by the end of 2005.

He admits that as most of the existing Oeic funds do not have a three-year track record, this has deterred some advisers from recommending them. This is despite the fact that most funds have established offshore or US-domiciled equivalents. Hammond adds that the investment style of Franklin Templeton means its funds may underperform over the short term. Over the past year, none of the Oeic funds, according to Standard & Poor’s, is top-quartile. Four are in the second quartile, while another four are in the fourth. Only two of the funds have three-year track records, with Templeton Growth in the second quartile and Franklin Biotechnology in the third quartile over this time period.

Franklin Templeton has four different approaches to managing money within the group. The Templeton process, for example, is a research-driven, value, team-based and bottom-up approach. It argues that managers and analysts examine all traditional measures of value with an emphasis on a company’s current price relative to its future earnings potential. In doing this, managers and analysts take a five-year view of the value of a company and therefore claim to be relatively unconcerned about short-term performance. Analysts present companies as potential holdings to fellow analysts before they are placed on a Bargain List. Fund managers select stocks for their portfolios from this list. In contrast, Franklin takes a growth at a reasonable price and blend approach, Fiduciary has a growth style and Mutual Series takes a deep-value approach.

Hammond says Franklin Templeton is able to sit down with intermediaries and explain the investment process, as well as its “history, size and breadth of research capability”, including the fact it has about $417bn (233bn) in assets under management and offices in more than 30 countries.

“We can show the long track record we have for the same funds domiciled in the US, such as Franklin Mutual Shares and Templeton Growth,” says Hammond. “The issue for us is that most of the Oeic funds have short-term records. It will help when they all have three-year track records. This will demonstrate the good risk-adjusted returns we can deliver. The key message we give intermediaries and investors is that our process is aimed at helping them to sleep at night.”

The asset manager is keen to point to the performance of the Templeton Growth fund since launch in 1954. If $10,000 had been invested in 1954, the Templeton Growth fund would have grown to $6.67m, the S&P 500 index to $1.86m, the MSCI World Index to $1.82m and the US Treasury Bill index to $849,044.

In advance of growing the Oeic range, Franklin Templeton has been trying to raise its profile and expand its distribution base. This has included the use of the Benjamin Franklin image. “He is a familiar image in the UK as his face is on $100 notes in the US. We have been spreading the message that Franklin Templeton is a worldwide group with more than $400bn in assets under management.

“We decided the best strategy over the last 12 to 18 months was to gain a presence on distribution platforms and then increase the marketing of our funds to IFAs. The first stage was to make the funds as widely available as possible. We have therefore got our funds listed on FundsNetwork and Cofunds and have links with Axa, Winterthur and Skandia. The platforms will become an even more important part of the distribution market as they handle the administration for advisers and can improve reporting and service.”

Darius McDermott, managing director of Chelsea Financial Services, says Franklin Templeton’s efforts to raise its profile are beginning to work, although none of its funds have made it on to its Leaders list. “Franklin Mutual Shares was very close to getting on to our list, but then manager David Winters announced he was leaving in May.

“The other fund that has caught our attention is the Templeton Growth fund, managed by Ken Cox. This is a pretty good fund with consistent performance. The most high-profile manager is obviously Mark Mobius. We like Franklin Templeton as a group, but the problem is that funds need to be consistently first-quartile to catch investors’ attention. Second-quartile is OK to retain money, but not to attract new investors. Our clients tend to prefer pragmatic managers who can perform well in all market conditions to a long-term value approach. Fund of funds managers may like to dip into Franklin Templeton funds when they believe we are in a deep-value cycle.”

Hans Hamre, director of research at Investment Manager Selection, says it holds Franklin US Equity, managed by Kent Shepherd, in its portfolios. “We think Kent Shepherd is a very capable manager. He has had a difficult time recently but we have felt comfortable continuing to hold the fund.”

Hamre adds that Franklin Templeton funds should not be judged over the short term. “The Templeton funds in particular take a value approach over the longer term. Investors need to be aware of the type of manager they are investing with and that the performance should be evaluated over a full cycle.”

Mark Dampier, head of research at Hargreaves Lansdown, says that none of the Franklin Templeton Oeic funds is currently on its recommended list. “I’ve invested in the Templeton Emerging Markets investment trust. The Global Emerging Markets fund has delivered a strong positive return over the past year but is in the fourth quartile, which it should not be. The problem is that funds need to stand out with top-quartile performance, as there are some good managers around. You can talk about long-term performance but this is made up of a series of short-term performances.”

Hammond stresses that Franklin Templeton is a global asset management group and it took a relatively long time to focus on the retail market in Britain partly because of the success of its businesses in other European markets. He points to the fact that Franklin Templeton is the largest foreign asset manager in Germany. “We developed a pan-European fund range in the Luxembourg Sicav, which was closed to the UK market because until last year it was not possible to gain distributor status for individual underlying funds. Other markets like Germany grew strongly for us, so we tended to focus on them and the UK fell a little behind.”

Franklin Templeton’s management has changed, with Jed Plafker, managing director of Franklin Templeton Investments’ international retail group, having moved from Britain to America. He continues to oversee Britain, but Hans Wisser has taken over marketing and sales responsibilities for the whole of continental Europe. Hammond, who reports to both Plafker and Wisser, says the British business can benefit from this change.

“As Jed has spent time in the UK, he understands the business and what the market here requires,” says Hammond. “He can help us in explaining to the US about the fund requirements we have to grow the business in the UK.”

Franklin Templeton Investments began in 1947, when Franklin Distributors was founded in New York. Following a series of acquisitions – including that of Templeton in 1992 – it is now one of the largest fund managers in the world, with assets under management of $417bn (233bn). It launched its Luxembourg Sicav in 1990 and since 2003 has been actively promoting its British Oeic range, which now offers eight subfunds. Franklin Templeton is headquartered in San Mateo, California and has offices in 30 countries servicing more than nine million investors.