Investors in Franklin Templeton Investments mutual funds withdrew more money in August than in any month in more than 20 years as its best-known funds were punished for soured bets.
Once a contender for top sales among all mutual fund firms — Franklin Templeton reached third for net sales among mutual fund companies in 1997 — the firm now faces the potential for its first year of outflows since the financial crisis in 2008, when it lost $16.8 billion to redemptions. Its outflows in August, $5.4 billion in open-end funds, narrowly topped its outflows in Oct. 2008, according to estimates by Morningstar Inc. That level of withdrawals is the largest since at least January 1993, when Morningstar began tracking flows.
The firm's Templeton Global Bond Fund (TPINX) and Franklin Income Fund (FKINX) have suffered a combined $8.6 billion in outflows so far this year.
Global Bond, managed in part by star investor Michael J. Hasenstab since 2001, has been punished for a bet on Ukraine that was sliced by more than half over the 16 months that ended June 30, Reuters reported Thursday.
As of June, Ukraine accounted for 2.2% of the $61 billion Templeton Global Bond Fund, Morningstar said. The fund is down 8% over the last year, but it's in the top third among its peers over five years and the top 1% over 10 years.
Franklin Templeton led a group of creditors in negotiations with Kiev that culminated in an Aug. 27 deal that could allow the troubled emerging market to restructure $18 billion of its debt. It would require that creditors write down a fifth of the bonds' value. The country's parliament is due to vote on the deal within days. That's led those bonds to see a lift in the marketplace.
On Aug. 25, Mr. Hasenstab and colleague Sonal Desai wrote that they continued to be bullish on emerging markets. They didn't comment directly on Ukraine, instead noting their appetite for other markets that had been “indiscriminately punished” by investors.
“As we remain optimistic regarding the outlook for Mexico and Malaysia, it highlights how our strategies will often be contrarian,” the note said. “If we are not underperforming the market or our competitors for some given period, it implies we aren't actually taking contrarian views and making those types of calls that go against prevailing market sentiment. Ultimately, we believe these periods will be short lived as every positon we hold is based on a deep-conviction, fundamentally driven view.”
Stock holdings in the $83 billion Franklin Income Fund, meanwhile, were hit by declines in its energy, industrial, consumer discretionary and utility holdings, the firm said in June. Senior manager Edward D. Perks has been working on the fund since 2002. The "A" share class of the Franklin Income Fund is down 9.8% over the last year, behind 94% of peers, but it's in the top fifth of performers over 10 years.
The fund company's parent, publicly traded Franklin Resources Inc. (BEN), has $806 billion under management, as of Aug. 31. That's down from $854 billion a month ago and $922 billion a year ago. The company's stock is off 29% this year.
The firm remains something of a family enterprise. Brothers Rupert H. Johnson Jr. and Charles B. Johnson alone own a third of the company. Chief executive Gregory E. Johnson is Charles' son. Starting next month, Jennifer M. Johnson, Gregory's sister and the firm's chief operating officer, will take on a new role as co-president, alongside Vijay C. Advani, a top sales and marketing executive.
San Mateo, Calif.-based Franklin Templeton did not respond to a request for comment.
Alec Lucas, an analyst who covers the firm for Morningstar, said those executives will be under pressure to drive growth for its wide suite of products to compensate for the losses from a few top funds.
In addition to the troubles of the large bond and income products, the firm is being whipsawed by outflows from actively managed mutual funds to index-based exchange-traded funds; some exposure to Puerto Rico's massive debt, which the U.S. island territory has said it cannot pay; and general fears surrounding how the bond market will respond to a widely expected hike in interest rates by the Federal Reserve, Mr. Lucas said.
“With any firm you want to see flows moving in a positive direction so it presents a challenge for trying to reverse the trend,” said Mr. Lucas. “The private ownership does give the firm the ability to weather periods like this where they're going through significant outflows to survive.”