Stretch Money

Franklin Templeton: A Deeper Look at the Performance

Stretch Money

Franklin Templeton is one of the largest asset managers in the world. Celebrating its 70th Anniversary this year, Franklin Templeton has become a household name among retail and institutional investors alike.

Based out of San Mateo, CA, Franklin Templeton manages approximately $740 billion in assets as of March 31, 2017. It trades publicly on the New York Stock Exchange under the ticker symbol BEN, after Benjamin Franklin, for whom the company is named. Franklin Templeton Investments is a subsidiary of Franklin Resources, Inc.

But not all news has been good news for Franklin Templeton. One of the most recent lawsuits the company has found themselves in deals with breach of fiduciary duty from self-dealing within their own company’s 401(k) plan. As many investors know, 401(k) plans have a list of investment options provided to participants from which they get to choose based on their individual investment objectives. While it doesn’t seem absurd to put your own funds within your own 401(k) plan, there may be an issue if the only option is your company’s proprietary products, which happen to be overpriced and underperforming. Cryer vs. Franklin Resources, Inc., is moving forward and has recently been approved by Federal District Court of San Francisco, the honorable Claudia Wilken.

Today, we are going to take a deep dive into Franklin Templeton’s long-term performance in order to shed light on what has become increasingly apparent within the active money management industry. We have taken a deeper look at the performance of several other mutual fund companies and hedge funds and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can read our previous reviews by clicking any of the links below:

Controlling for Survivorship Bias

It is important for investors to understand the idea of survivorship bias. While there are currently 107 strategies offered by Franklin Templeton, it doesn't necessarily mean that these are the only strategies that Franklin Templeton has ever managed. In fact, there are an additional 60 funds that no longer exist. This can be due to a variety of reasons including poor performance or the fact that they were merged with another fund. When making conclusions about performance, it is important to include funds that no longer exist.

 

Fees & Expenses

Let's first examine the costs associated with their current strategies (107 total). It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, as well as 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities due to short term and long term capital gains distributions relative to those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 107 active funds offered by Franklin Templeton that have at least 3 years of complete performance history. On average, an investor who utilized an equity strategy from Franklin Templeton experienced a 1.05% expense ratio, a 0.24% 12b-1 fee, and a 5.51% max front load for those strategies that have a 12b-1 fees and front loads associated with them. Similarly, on average, an investor who utilized a fixed income strategy from Franklin Templeton experienced a 0.70% expense ratio, a 0.12% 12b-1 fee, and a 3.92% max front load for those strategies that have a 12b-1 fees and front loads associated with them. These expenses can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance. The average turnover ratio for the strategies offered by Franklin Templeton was 37.30% for their equity strategies and 40.53% for their fixed income strategies. This implies an average holding period for each position of about 2.5 to 3 years. It is safe to say that Franklin Templeton makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term.

You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Max Front Load Global Category
Franklin Adjustable US Govt Secs A FISAX 11.49 0.91 0.25 2.25 US Fixed Income
Franklin Federal Interm-Term T/F Inc A FKITX 8.98 0.66 0.1 2.25 US Municipal Fixed Income
Franklin Income A FKINX 61.26 0.61 0.15 4.25 Cautious Allocation
Franklin MD Tax-Free Income A FMDTX 33.34 0.67 0.1 4.25 US Municipal Fixed Income
Franklin NY Intermediate T/F Income A FKNIX 3.30 0.65 0.1 2.25 US Municipal Fixed Income
Franklin OR Tax-Free Income A FRORX 16.89 0.63 0.1 4.25 US Municipal Fixed Income
Franklin Pelagos Commodities Strat Adv FSLPX 42.22 0.95     Commodities Broad Basket
Franklin MO Tax-Free Income A FRMOX 11.66 0.65 0.10 4.25 US Municipal Fixed Income
Franklin MicroCap Value A FRMCX 11.72 1.19 0.24 5.75 US Equity Small Cap
Franklin PA Tax-Free Income A FRPAX 10.88 0.64 0.10 4.25 US Municipal Fixed Income
Franklin Total Return Adv FBDAX 287.38 0.63     US Fixed Income
Franklin AZ Tax-Free Income A FTAZX 13.02 0.63 0.1 4.25 US Municipal Fixed Income
Franklin CO Tax-Free Income A FRCOX 13.61 0.65 0.1 4.25 US Municipal Fixed Income
Franklin Moderate Allocation A FMTIX 29.22 1.27 0.25 5.75 Moderate Allocation
Franklin LA Tax-Free Income A FKLAX 16.87 0.68 0.1 4.25 US Municipal Fixed Income
Templeton China World A TCWAX 3.87 1.91 0.25 5.75 Greater China Equity
Franklin AL Tax-Free Income A FRALX 16.81 0.72 0.1 4.25 US Municipal Fixed Income
Franklin CT Tax-Free Income A FXCTX 12.4 0.71 0.1 4.25 US Municipal Fixed Income
Franklin GA Tax-Free Income A FTGAX 8.34 0.67 0.1 4.25 US Municipal Fixed Income
Franklin LifeSmart™ 2020 Retire Trgt R6 FRTSX 87.38 0.65     Target Date 2000-2020
Franklin MI Tax-Free Inc A FTTMX 12.35 0.65 0.1 4.25 US Municipal Fixed Income
Franklin NJ Tax-Free Income A FRNJX 9.2 0.65 0.1 4.25 US Municipal Fixed Income
Franklin Federal Tax-Free Income A FKTIX 13.86 0.61 0.1 4.25 US Municipal Fixed Income
Franklin FL Tax-Free Income A FRFLX 13.84 0.65 0.1 4.25 US Municipal Fixed Income
Franklin CA Ultra-Shrt Tx-Fr Inc A1 FCUAX   0.37     US Municipal Fixed Income
Franklin Federal Limited-Term T/F Inc A FFTFX 18.54 0.63 0.15 2.25 US Municipal Fixed Income
Franklin CA Tax-Free Income A FKTFX 19.37 0.59 0.1 4.25 US Municipal Fixed Income
Franklin CA Interm-Term Tx-Fr Income A FKCIX 3.91 0.63 0.1 2.25 US Municipal Fixed Income
Franklin CA High Yield Municipal A FCAMX 19.73 0.65 0.1 4.25 US Municipal Fixed Income
Franklin OH Tax-Free Inc A FTOIX 14.17 0.63 0.1 4.25 US Municipal Fixed Income
Franklin NY Tax-Free Income A FNYTX 17.44 0.61 0.1 4.25 US Municipal Fixed Income
Franklin TN Municipal Bond A FRTIX 18.95 0.72 0.1 4.25 US Municipal Fixed Income
Franklin US Government Secs A FKUSX 92.18 0.77 0.15 4.25 US Fixed Income
Franklin Utilities A FKUTX 7.17 0.73 0.15 4.25 Utilities Sector Equity
Franklin MA Tax-Free Income A FMISX 7.16 0.67 0.1 4.25 US Municipal Fixed Income
Franklin Rising Dividends A FRDPX 1.74 0.91 0.25 5.75 US Equity Large Cap Blend
Franklin Strategic Mortgage A1 FSMIX 551.77 0.75   4.25 US Fixed Income
Franklin Convertible Securities A FISCX 28.03 0.86 0.25 5.75 Convertibles
Franklin High Yield Tax-Free Inc A FRHIX 12.26 0.64 0.1 4.25 US Municipal Fixed Income
Templeton Global Currency A ICPHX 0 1.26 0.25 2.25 Currency
Templeton World A TEMWX 21.62 1.07 0.25 5.75 Global Equity
Templeton Growth A TEPLX 23.05 1.07 0.25 5.75 Global Equity
Franklin Global Real Estate Adv FVGRX 28 1.15     Real Estate Sector Equity
Templeton Emerging Markets Small Cap Adv TEMZX 21.26 1.72     Emerging Markets Equity
Franklin Emerging Market Debt Opps FEMDX 21.61 1.01     Emerging Markets Fixed Income
Franklin Intl Small Cap Growth Adv FKSCX 21.93 1.14     Global Equity Mid/Small Cap
Franklin Mutual Quest Z MQIFX 44.04 0.79     Allocation
Templeton International Bond Adv FIBZX 31.37 0.78     Global Fixed Income
Templeton Foreign Smaller Companies A FINEX 28.19 1.86 0.24 5.75 Global Equity Mid/Small Cap
Templeton Ins Foreign Smaller Co Ser Adv TFSCX 21.36 0.98     Global Equity Mid/Small Cap
Templeton Global Smaller Comp A TEMGX 28.73 1.41 0.25 5.75 Global Equity Mid/Small Cap
Franklin Mutual International Z FMIZX 24.87 1.17     Global Equity Large Cap
Templeton Instl Emerging Markets Ser Adv TEEMX 17.55 1.31     Emerging Markets Equity
Templeton Global Total Return Adv TTRZX 17.1 0.83     Global Fixed Income
Templeton Developing Markets A TEDMX 27.4 1.58 0.25 5.75 Emerging Markets Equity
Templeton Foreign A TEMFX 22.89 1.22 0.25 5.75 Global Equity Large Cap
Templeton Global Balanced Adv TZINX 16.66 0.91     Allocation
Templeton Emerging Markets Bal Adv TZEMX 26.32 1.25     Emerging Markets Equity
Templeton Instl Intl Eq Ser Primary TFEQX 14.88 0.78     Global Equity Large Cap
Templeton Emerging Markets Bond Advisor FEMZX 15.23 1.03     Emerging Markets Fixed Income
Franklin Mutual Financial Services Z TEFAX 34.58 1.13     Financials Sector Equity
Franklin Intl Growth Adv FNGZX 27.27 1     Global Equity Large Cap
Templeton Inst Global Equity Series Adv TGESX 27.91 0.84     Global Equity
Franklin K2 Alternative Strategies R6 FASRX 209.45 1.87     Multialternative
Templeton Frontier Markets Adv FFRZX 29.11 1.75     Emerging Markets Equity
Franklin Growth A FKGRX 7.53 0.88 0.25 5.75 US Equity Large Cap Growth
Franklin Mutual European Z MEURX 16.43 1.06     Europe Equity Large Cap
Franklin Natural Resources A FRNRX 29.74 1.14 0.27 5.75 Natural Resources Sector Equity
Franklin Corefolio Allocation Advisor FCAZX 0.4 0.79     Aggressive Allocation
Templeton Global Bond A TPINX 22.63 0.93 0.25 4.25 Global Fixed Income
Franklin Mutual Shares Z MUTHX 20.56 0.8     Aggressive Allocation
Templeton Global Opportunities A TEGOX 22.62 1.32 0.25 5.75 Global Equity
Franklin LifeSmart™ 2025 Retire Trgt Adv FLRFX 83.67 0.72     Target Date 2021-2045
Franklin LifeSmart™ 2030 Retire Trgt R6 FLERX 81.66 0.69     Target Date 2021-2045
Franklin LifeSmart™ 2035 Retire Trgt Adv FLRHX 77.39 0.74     Target Date 2021-2045
Franklin LifeSmart™ 2040 Retire Trgt R6 FLREX 72.22 0.7     Target Date 2021-2045
Franklin LifeSmart™ 2045 Retire Trgt Adv FLRLX 75.72 0.76     Target Date 2021-2045
Franklin LifeSmart™ 2050 Retire Trgt R6 FRLEX 89.82 0.7     Target Date 2046
Franklin LifeSmart™ Retirement Inc Adv FLRDX 149.53 0.6     Target Date 2000-2020
Franklin Low Duration Total Return A FLDAX 44.76 0.82 0.25 2.25 US Fixed Income
Franklin Real Estate Securities A FREEX 39.66 1 0.25 5.75 Real Estate Sector Equity
Franklin Founding Funds Allocation Adv FFAAX 0.06 0.75     Aggressive Allocation
Franklin Growth Opportunities Adv FRAAX 47.75 0.77     US Equity Large Cap Growth
Franklin India Growth Adv FIGZX 21.54 1.4     India Equity
Franklin Conservative Allocation A FTCIX 34.83 1.24 0.25 5.75 Cautious Allocation
Franklin KY Tax-Free Income A FRKYX 9.14 0.77 0.1 4.25 US Municipal Fixed Income
Franklin Mutual Beacon Z BEGRX 30.94 0.8     Aggressive Allocation
Franklin Balanced Adv FBFZX 46.03 0.77     Moderate Allocation
Franklin Growth Allocation A FGTIX 30.19 1.32 0.25 5.75 Aggressive Allocation
Franklin High Income A FHAIX 35.06 0.78 0.15 4.25 High Yield Fixed Income
Franklin DynaTech A FKDNX 22.42 0.91 0.25 5.75 US Equity Large Cap Growth
Franklin Small Cap Growth Adv FSSAX 29.93 0.87     US Equity Small Cap
Franklin Focused Core Equity Adv FCEZX 17.45 1     US Equity Large Cap Blend
Franklin Equity Income A FISEX 50.05 0.88 0.25 5.75 US Equity Large Cap Value
Franklin Small Cap Value A FRVLX 41.89 1.11 0.25 5.75 US Equity Small Cap
Franklin Small-Mid Cap Growth A FRSGX 35.46 0.96 0.25 5.75 US Equity Mid Cap
Franklin Mid Cap Value Adv FMVZX 86.55 1.05     US Equity Mid Cap
Franklin Strategic Income A FRSTX 140.83 0.88 0.25 4.25 US Fixed Income
Franklin Balance Sheet Investment A FRBSX 30.25 0.93 0.25 5.75 US Equity Mid Cap
Franklin MN Tax-Free Inc A FMINX 13.8 0.65 0.1 4.25 US Municipal Fixed Income
Franklin Mutual Global Discovery Z MDISX 17.01 0.99     Global Equity
Franklin Biotechnology Discovery A FBDIX 34.12 0.99 0.24 5.75 Healthcare Sector Equity
Franklin VA Tax-Free Income A FRVAX 17.44 0.65 0.1 4.25 US Municipal Fixed Income
Franklin Gold and Precious Metals A FKRCX 16.76 1.11 0.25 5.75 Precious Metals Sector Equity
Franklin NC Tax-Free Income A FXNCX 18.38 0.64 0.1 4.25 US Municipal Fixed Income
Franklin Real Return Adv FARRX 31.82 0.68     Inflation Linked
Franklin Floating Rate Daily Access Adv FDAAX 34.1 0.62     US Fixed Income

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Franklin Templeton’s “expertise.” We compare each of their 167 strategies, which include both current funds and funds no longer in existence, since inception against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 75% (126 of 167 funds) have underperformed their respective benchmarks or did not survive the period since inception.
  • 25% (41 of 167 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha
  • 0.60% (1 of 167 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is safe to say that the majority of funds offered by Franklin Templeton have not outperformed their Morningstar assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indices assigned by Morningstar, then we may form a false conclusion that Franklin Templeton has the “secret sauce” as active managers. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. Let alone the fact that the style attribution of a fund often changes over time (see Step 6: Style Drifters).

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based funds from Franklin Templeton that have been around for the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for the multiple Betas that we know are being systematically priced into the overall market. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2016. As you can see, of the 10 funds that met the criteria, 0 produced an alpha that was statistically significant at the 95% confidence level (green shaded area). Why is this important? It means that if we wanted to simply replicate their risk exposure, we could do so more cost effectively through the use of index funds. Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.

Conclusion

Like many of the other financial institutions, a deep analysis into the performance of Franklin Templeton has yielded a not so surprising result: active management is likely to fail the majority of investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds. 

Below are the individual alpha charts for each one of the currently available Franklin Templeton funds. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.