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Franklin Templeton: A Deeper Look at the Performance

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Franklin Templeton is one of the largest active asset managers in the world. After struggling through years of net outflows, however, the California-based global funds giant has agreed to buy another venerable fund company, Legg Mason. The deal, which is expected to close later this year, will create a combined firm with $1.5 trillion in assets under management -- more than doubling the acquirer's asset base.1 

The reconstructed Franklin Templeton is a subsidiary of Franklin Resources Inc., a holding company that encompasses several past mergers including funds offered under the Franklin, Templeton, Mutual Series and Fiduciary brands. Franklin trades publicly on the New York Stock Exchange under the ticker symbol BEN. Like Legg Mason, it's considered a pioneer of active funds management -- Franklin was started by a former broker in 1947 and Legg Mason traces its roots to 1899. 

"Many active asset managers including Legg Mason and Franklin Templeton have struggled to adapt to the flow of hundreds of billions of dollars in client money into low-cost funds that track popular indexes. The shift away from managers that actively pick stocks has crimped profits at those firms and forced them to hunt for new sources of revenue and ways to slash expenses, such as mergers," noted the Wall Street Journal in examining the proposed mega-deal.2 

Citing Morningstar data, Pensions & Investment magazine reported that passive funds added a cumulative $450.7 billion during 2019. Meanwhile, the industry's active counterparts had $106 billion in net outflows for the year.3 

Just prior to the deal, Morningstar gave Franklin Templeton a rather sober assessment as a standalone active manager. The independent funds researcher forecast Franklin "generating negative 4%-6% average annual organic AUM growth, with only slightly better levels of revenue growth and much lower operating margins on average during fiscal 2019-23." The Morningstar analysis also pointed to "poor relative active investment performance" by managers at Franklin Templeton.4

Given this firm's history in the industry and plans to expand even deeper into alternative investments and active management by purchasing Legg Mason, we're putting Franklin Templeton's existing family of funds under our research microscope. This should help to provide investors with a better view of how the acquirer's long-term performance track record stacked up before folding another large set of funds under its corporate banner. (The acquisition must also clear regulatory hurdles and isn't expected to close until later in 2020.) 

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 88 active mutual funds with five or more years of performance-related data currently offered by Franklin Templeton, it doesn't necessarily mean these are the only strategies this company has ever managed. In fact, there are 72 mutual funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly. 

Fees & Expenses

Let's first examine the costs associated with Franklin Templeton's surviving 88 strategies. 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), deferred (B) and level (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 expenses 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 costs 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 one year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 88 surviving active funds offered by Franklin Templeton that have at least five years of complete performance history. 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 High Yield Tax Free Inc A1 FRHIX 6.16 0.66 0.10 3.75 US Municipal Fixed Income
Franklin Federal Interm-Term T/F Inc A1 FKITX 2.57 0.56 0.10 2.25 US Municipal Fixed Income
Franklin OH Tax-Free Inc A1 FTOIX 13.09 0.65 0.10 3.75 US Municipal Fixed Income
Franklin PA Tax-Free Income A1 FRPAX 6.40 0.68 0.10 3.75 US Municipal Fixed Income
Franklin MN Tax-Free Inc A1 FMINX 13.97 0.68 0.10 3.75 US Municipal Fixed Income
Franklin MA Tax-Free Income A1 FMISX 6.58 0.71 0.10 3.75 US Municipal Fixed Income
Franklin NJ Tax Free Income A1 FRNJX 13.26 0.68 0.10 3.75 US Municipal Fixed Income
Franklin Federal Lmtd-Term T/F Inc A1 FFTFX 64.94 0.55 0.15 2.25 US Municipal Fixed Income
Franklin CA Tax Free Income A1 FKTFX 14.12 0.61 0.10 3.75 US Municipal Fixed Income
Franklin CA High Yield Municipal A1 FCAMX 13.91 0.68 0.10 3.75 US Municipal Fixed Income
Franklin CA Interm-Term Tx-Fr Inc A1 FKCIX 15.26 0.59 0.10 2.25 US Municipal Fixed Income
Franklin NY Intermediate T/F Income A1 FKNIX 16.12 0.69 0.10 2.25 US Municipal Fixed Income
Franklin NY Tax Free Income A1 FNYTX 19.78 0.63 0.10 3.75 US Municipal Fixed Income
Franklin MI Tax-Free Inc A1 FTTMX 11.55 0.68 0.10 3.75 US Municipal Fixed Income
Franklin OR Tax Free Income A1 FRORX 9.09 0.65 0.10 3.75 US Municipal Fixed Income
Franklin Tennessee Municipal Bond A1 FRTIX 3.46 0.78 0.10 3.75 US Municipal Fixed Income
Franklin CO Tax Free Income A1 FRCOX 10.85 0.69 0.10 3.75 US Municipal Fixed Income
Franklin MO Tax Free Income A1 FRMOX 9.79 0.69 0.10 3.75 US Municipal Fixed Income
Franklin Kentucky Tax Free Income A1 FRKYX 18.61 0.81 0.10 3.75 US Municipal Fixed Income
Franklin VA Tax Free Income A1 FRVAX 9.60 0.69 0.10 3.75 US Municipal Fixed Income
Franklin AZ Tax Free Income A1 FTAZX 18.13 0.66 0.10 3.75 US Municipal Fixed Income
Franklin Alabama Tax Free Income A1 FRALX 8.57 0.76 0.10 3.75 US Municipal Fixed Income
Franklin CT Tax-Free Income A1 FXCTX 15.00 0.77 0.10 3.75 US Municipal Fixed Income
Franklin Georgia Tax Free Income A1 FTGAX 11.78 0.72 0.10 3.75 US Municipal Fixed Income
Franklin Louisiana Tax Free Income A1 FKLAX 9.46 0.73 0.10 3.75 US Municipal Fixed Income
Franklin MD Tax Free Income A1 FMDTX 5.33 0.73 0.10 3.75 US Municipal Fixed Income
Franklin NC Tax-Free Income A1 FXNCX 11.61 0.68 0.10 3.75 US Municipal Fixed Income
Franklin Federal Tax Free Income A1 FKTIX 14.58 0.63 0.10 3.75 US Municipal Fixed Income
Franklin Florida Tax Free Income A1 FRFLX 10.03 0.70 0.10 3.75 US Municipal Fixed Income
Franklin US Government Secs A1 FKUSX 41.34 0.79 0.15 3.75 US Fixed Income
Franklin Adjustable US Govt Secs A FISAX 12.72 0.96 0.25 2.25 US Fixed Income
Franklin Low Duration Total Return A FLDAX 51.93 0.72 0.25 2.25 US Fixed Income
Franklin Real Return Adv FARRX 35.41 0.64     US Fixed Income
Franklin Strategic Income A FRSTX 116.21 0.89 0.25 3.75 US Fixed Income
Franklin Strategic Mortgage A1 FSMIX 223.36 0.76   3.75 US Fixed Income
Franklin Total Return Adv FBDAX 169.95 0.63     US Fixed Income
Franklin Convertible Securities A FISCX 26.83 0.85 0.25 5.50 Convertibles
Franklin High Income A1 FHAIX 25.48 0.76 0.15 3.75 US Fixed Income
Templeton International Bond Adv FIBZX 43.13 0.83     Fixed Income Miscellaneous
Templeton Global Total Return Adv TTRZX 20.91 0.84     Fixed Income Miscellaneous
Templeton Global Bond A TPINX 19.86 0.94 0.25 3.75 Fixed Income Miscellaneous
Franklin Emerging Market Debt Opps FEMDX 14.29 1.02     Emerging Markets Fixed Income
Templeton Emerging Markets Bond Advisor FEMZX 18.82 1.00     Emerging Markets Fixed Income
Franklin Corefolio Allocation Advisor FCAZX 3.94 0.74     Aggressive Allocation
Franklin Mutual Shares Z MUTHX 20.72 0.77     Aggressive Allocation
Franklin Mutual Quest Z MQIFX 115.52 0.78     Moderate Allocation
Templeton Global Balanced Adv TZINX 45.92 0.94     Moderate Allocation
Franklin Growth Allocation A FGTIX 30.79 1.18 0.25 5.50 Aggressive Allocation
Franklin Founding Funds Allocation Adv FFAAX 0.73 0.73     Aggressive Allocation
Franklin Conservative Allocation A FTCIX 30.70 1.13 0.25 5.50 Cautious Allocation
Franklin Income A1 FKINX 43.63 0.62 0.15 3.75 Cautious Allocation
Franklin K2 Alternative Strategies R6 FASRX 235.47 2.26     Multialternative
Franklin Moderate Allocation A FMTIX 33.65 1.24 0.25 5.50 Moderate Allocation
Franklin Managed Income Adv FBFZX 53.02 0.68     Moderate Allocation
Franklin Intl Growth Adv FNGZX 18.11 0.88     Global Equity Large Cap
Franklin Mutual International Z FMIZX 28.75 0.97     Global Equity Large Cap
Templeton Instl Intl Eq Ser Primary TFEQX 25.60 0.81     Global Equity Large Cap
Templeton Foreign A TEMFX 30.81 1.10 0.25 5.50 Global Equity Large Cap
Franklin Mutual Global Discovery Z MDISX 14.70 0.98     Global Equity Large Cap
Templeton World A TEMWX 25.16 1.05 0.25 5.50 Global Equity Large Cap
Templeton Growth A TEPLX 25.30 1.06 0.25 5.50 Global Equity Large Cap
Franklin Mutual Beacon Z BEGRX 47.20 0.81     Global Equity Large Cap
Templeton Inst Global Equity Series Adv TGESX 34.14 0.85     Global Equity Large Cap
Templeton Global Smaller Comp A TEMGX 18.87 1.34 0.25 5.50 Global Equity Mid/Small Cap
Templeton China World A TCWAX 5.69 1.83 0.25 5.50 Greater China Equity
Templeton Developing Markets A TEDMX 9.96 1.39 0.25 5.50 Global Emerging Markets Equity
Templeton Frontier Markets Adv FFRZX 48.62 1.76     Global Emerging Markets Equity
Templeton Emerging Markets Small Cap Adv TEMZX 12.22 1.61     Global Emerging Markets Equity
Franklin Mutual European Z MEURX 35.42 1.04     Europe Equity Large Cap
Franklin Intl Small Cap Adv FKSCX 11.86 1.16     Global Equity Mid/Small Cap
Templeton Ins Foreign Smaller Co Ser Adv TFSCX 34.10 1.01     Global Equity Mid/Small Cap
Franklin Gold and Precious Metals A FKRCX 12.82 0.98 0.25 5.50 Precious Metals Sector Equity
Franklin DynaTech A FKDNX 20.01 0.86 0.25 5.50 US Equity Large Cap Growth
Franklin Growth A FKGRX 4.91 0.84 0.25 5.50 US Equity Large Cap Growth
Franklin Growth Opportunities Adv FRAAX 24.21 0.70     US Equity Large Cap Growth
Franklin Rising Dividends A FRDPX 2.65 0.87 0.25 5.50 US Equity Large Cap Blend
Franklin Equity Income A FISEX 23.23 0.84 0.25 5.50 US Equity Large Cap Value
Franklin Small Cap Growth Adv FSSAX 42.10 0.82     US Equity Small Cap
Franklin Small Cap Value A FRVLX 57.84 1.05 0.25 5.50 US Equity Small Cap
Franklin MicroCap Value A FRMCX 7.04 1.17 0.25 5.50 US Equity Small Cap
Franklin Small-Mid Cap Growth A FRSGX 54.28 0.91 0.25 5.50 US Equity Mid Cap
Franklin Mutual U.S. Value A FRBSX 44.31 0.91 0.25 5.50 US Equity Mid Cap
Franklin Mutual Financial Services Z TEFAX 33.11 1.09     Financials Sector Equity
Franklin Biotechnology Discovery A FBDIX 28.62 1.02 0.25 5.50 Healthcare Sector Equity
Franklin Utilities A1 FKUTX 7.90 0.73 0.15 3.75 Utilities Sector Equity
Franklin Natural Resources A FRNRX 29.83 1.04 0.25 5.50 Natural Resources Sector Equity
Franklin Real Estate Securities A FREEX 21.85 1.00 0.25 5.75 Real Estate Sector Equity
Franklin Floating Rate Daily Access Adv FDAAX 23.23 0.62     US Fixed Income

Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Franklin Templeton prospectuses are available at https://www.franklintempleton.com/investor/tools-and-resources/literature/browse/type/fund-prospectuses


On average, an investor who utilized a surviving active equity mutual fund strategy from Franklin Templeton experienced a 1.04% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 0.72% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Franklin Templeton were 25.49% and 27.91%, respectively. This implies an average holding period of 42.99 to 47.07 months.

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. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

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 implementation of active management. We compare each of its 160 strategies, which includes both current funds and funds no longer in existence, against its 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:

  • 81.25% (130 of 160 funds) have underperformed their respective benchmarks or did not survive the period since inception.

  • 18.75% (30 of 160 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

  • 1.25% (2 of 160 funds) have outperformed their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance will persist as opposed to being based on random outcomes.

As a result, this study shows that a 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 indexes assigned by Morningstar, then we may form a false conclusion that Franklin Templeton has the "secret sauce" as active managers.

Since 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.

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 U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies from Franklin Templeton that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2019. Screening criteria includes funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

Significance of Alpha of Franklin Templeton U.S. Mutual Funds*

As shown above, although four mutual funds had a positive excess return over the stated benchmarks, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Franklin Templeton alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures to these Franklin Templeton funds with indexes of the factors, we could blend the indexes and capture similar returns. 

To get similar risks and returns in a mutual fund would require the additional fees of those passively managed funds. That would alter such an analysis, but not by much because of the relatively low fees of the passively managed funds compared to the actively managed 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 largest financial institutions, a deep analysis into the performance of Franklin Templeton has yielded a not so surprising result: Active management is likely to fail many 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 the existing Franklin Templeton actively managed mutual funds that have five years or more of a track record.

 


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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.




Footnotes:

1.) Franklin Templeton, first fiscal quarter earnings report, Jan. 30, 2020.  

2.) The Wall Street Journal, "Franklin Resources to Buy Legg Mason for $4.5 Billion," Feb. 18, 2020.

3.) Pensions & Investments, "30% Market Gains?" Jan. 10, 2020.

4.) Morningstar, analyst Greggory Warren, Franklin Templeton quarterly review, Jan. 29, 2020. 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisor, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.