Franklin Templeton hit by further outflows in wake of Western probe

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The huge outflows from Franklin Templeton’s biggest subsidiary extended into October, as the $1.7tn asset manager said the group’s revenue and income would be weighed down by a regulatory probe at the unit.

Western Asset Management has experienced more than $53bn in net outflows since it revealed in August that its co-chief investment officer has been put on leave and warned he was facing possible action from the US Securities and Exchange Commission. The figure included nearly $28bn in September and another $18bn more in October.

Franklin shares were trading 4 per cent lower by early afternoon in New York after executives said on a call with analysts on Monday that Western’s annualised revenue was on track to drop by 20 per cent, and provide a 2 per cent drag on the overall group because of the outflows.

The impact on income will be higher until the company can reduce expenses proportionally, the company’s chief financial officer, Matthew Nicholls, said. “This is very important to us,” he said.

A number of big pension funds have started the process of moving their money in addition to the recent outflows.

Franklin took over Western as part of its 2020 purchase of Legg Mason and agreed to give it significant independence for five years. Franklin chief executive Jenny Johnson said the larger group was working with Western’s management to cut costs and “enhance” trading policies and practices.

Western, a core bond fund manager, is Franklin’s largest subsidiary by assets and accounts for 9 per cent of adjusted operating revenue, Nicholls said.

The update on Western came as Franklin dropped to an $85mn net loss for the quarter ending in September and took a $389mn impairment charge on mutual fund contracts managed by Western. Overall assets under management hit a record $1.7tn amid vibrant markets.

Johnson said Franklin was co-operating with US regulators and the Department of Justice but declined to give further details. Western co-chief investment officer Ken Leech has received a “Wells notice” warning that the SEC is considering whether to bring an enforcement action against him for allegedly “cherry-picking” client trades, the practice of giving more profitable trades to some clients over others. Not all Wells notices are followed by formal charges.

Flows to other parts of Franklin’s business turned slightly negative in the month of October after good inflows in the prior quarter, Nicholls said. Assets under management rose to an all-time high of $1.68tn in the quarter on the back of vibrant markets

Johnson said the California-based group remained upbeat about its efforts to move into new areas including alternative assets, exchange traded funds and separately management accounts. “We take pride in the efforts we’ve made over the past few years to further grow and diversify our business,” she said.