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Author: Zinj Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 30  
Subject: Re: Franklin Resources (BEN) Date: 8/17/1998 7:49 PM
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zvx10 wrote: "Ben seems to have lost it's steam. Any ideas why?"

Don't stick a fork in ol' Ben yet. It was flying high, we had a correction, Ben suffered. Almost ALL of the money Ben makes comes through management fees. There are two main ways to increase management fees collected:

1) Increase fees
2) Increase assets under management (thereby collecting fees on a larger asset base.

Increasing fees:

You may have read that Ben just did this, but what they increased was SALES fees, not MANAGEMENT fees. And yes, sales fees really do go to the broker/dealer agent, NOT to Ben. Incidentally, the sales charge increase only applies to the small account. Ben has a graduated fee structure whereby larger accounts pay a smaller sales charge (on a % basis) than smaller accounts. Not as large a % is necessary to keep the investment rep happy on the sale of a really big account. My guess why Ben increased sales charges on the smaller accounts is that they wanted to further increase the disincentive for smaller accounts to jump in and out of the market. This can be a real headache for funds that carry very little cash (Most of Ben's funds carry plenty of cash). I also think Ben wants to bias future business toward the more stable institutional account business. This is where they can really leverage their powerful relationships with the broker/dealer sales channel. Individual investors are trying all sorts of awful things like index funds and no-load funds.

But to get back to the point, I don't remember any substantial increase in MANAGEMENT fees on Ben's funds recently (though there are so dang many it's hard to keep track).

Increasing Assets under management:

This is where Ben has been a champion. Buying Templeton at a price that everyone decried as highway robbery at the time, was just one of several brilliantly-timed moves. The more recent acquisition of Michael Price's fund family has already proven to be a winner -- these five funds have done somthing like double their assets under management since the merger (don't quote me on that number though).

So now Ben has a full range of products: Domestic and Foreign equity and fixed-income, and an increasingly important line of home-grown insurance products. You might successfully argue that this company has grown TOO fast, but they certainly aren't going to fall apart anytime soon. Will Ben buy any more fund companies? Maybe, but it's difficult to see where there's a deficiency to be filled anymore...plus I doubt they want the challenge of incorporating another fund family while simultaneously confronting the Year 2000 challenges which affect the entire finance/banking industry.

So what is left to do? Just increase assets through new accounts. When the market goes south, a lot of money gets parked on the sidelines. This means reduced inflow (or even outflow) from Ben's funds. Simultaneoulsy, the value of the accounts Ben manages is reduced, meaning less income in Management fees. Kind of a double whammy -- you might want to check this out, but I wouldn't be surprised to see that BEN has a beta >>1.

But the market will come back, and Ben is locking up so much retirement plan business of late that it's basically guaranteeing inflow to funds even when there are sketchy markets.

Monitor the next few 10-Q's, not just for Ben, but some of the others like TROW, maybe a couple of banks...I wouldn't be at all surprised to see margins getting pinched b/c of short-term expenditures to correct Year 2000 problems. Check to see if this is in fact the line-item that's deteriorating . All the major companies are going to take short term hits of varying magnitude to overhaul their info systems.

Don't expect growth rates similar to 1992, Ben's really too big now to sustain that for very long. However, if you're in it for the long haul, Ben will thrive.
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