Jenny Johnson was at the movies with her kids when her phone rang. She stepped into a theatre lobby smelling like popcorn to answer the $4.5bn call.
“What’s your final number,” said Nelson Peltz. The activist investor had a 10 per cent stake in Legg Mason, the asset manager that Johnson’s family firm Franklin Templeton was trying to acquire, and Peltz was pushing for a higher price.
But the Johnsons were prepared to walk away. “He needed to know that we were done,” Johnson says. She told Peltz to take their final offer to the board and went back into the movie. Legg Mason accepted the deal terms.
The $6.5bn acquisition, including Legg Mason’s $2bn of debt, was the biggest deal in Franklin’s 75-year history and remains one of the largest in the industry’s history.
The company announced the all-cash deal in February 2020, shortly before the Covid-19 pandemic shut down swaths of the global economy and sent financial markets into a tailspin, and Franklin was accused by some of paying too much.
But Johnson, who had only just succeeded her elder brother Greg to become Franklin’s first female chief executive, is unrepentant. “We never looked back,” she says of the most high-profile component of a plan to stem outflows and reposition the company for a world increasingly dominated by huge managers peddling index-tracking products.
By the time of the Legg Mason deal, Franklin risked being overrun by seismic changes in its industry. Amid the wave of money going into low-cost index products and computer-driven trading strategies, the family-owned company specialised in offering more expensive funds run by managers who pick stocks and bonds.
However, conditions in markets have now started to shift. After more than a decade when bond-buying by the Federal Reserve and other central banks lifted all boats, rising rates are leading to more volatility, which could provide fruitful opportunities for active management. Some see it as a last chance for many stockpicking funds to prove their worth.
Johnson’s acquisition of Legg Mason and other businesses is a test of two propositions — that Franklin can diversify its operations enough to compete with rivals across a range of different products and that a family-run firm can still prosper in an industry dominated by behemoths such as BlackRock, Vanguard and State Street, which together have tens of trillions of dollars of assets under management.
Needing to catch up
In 2020, Johnson had taken the reins of a business regarded as outdated and stodgy. When Franklin did an external survey in 2020 to gauge investor perceptions of its brand, one of the leading responses was “old fashioned”.
The California-based firm “was a perfect representation of the way the [fund management] business used to be”, says Brennan Hawken, an analyst at UBS. “They sold high-cost products that weren’t selling anymore and had very much not adjusted their approach to marketing or positioning.”
“Franklin was only hanging in because it had a huge global franchise,” said Alex Blostein, an analyst at Goldman Sachs.
Foremost among those products was the Templeton Global Bond fund, run by star fund manager Michael Hasenstab. In 2014, the bond fund’s global assets hit $111bn thanks to his daring bets on countries such as Hungary and Ireland and represented nearly 12 per cent of Franklin’s total assets under management.
Greg Johnson, now executive chair, says the concentration risk and size of the funds were long-held concerns within Franklin. The bond fund had grown exponentially from “nothing”, he says. “We had one fund topping sales every place in the world, knowing that was going to reverse at some point and was not sustainable.”
The fund’s popularity with investors had pushed Franklin’s growth at a clip that masked the upheaval in the broader industry, where similar midsized peers were being hammered by the rise of passive investment specialists.
From 2014, the Global Bond fund’s performance fizzled, and investors rushed to pull money out. Ill-timed bets on Argentina and US government bonds led to further outflows. Franklin’s share price halved over the subsequent six years, significantly underperforming other asset managers. The version of the bond fund available to US investors has seen its assets under management decline from a peak of $72.6bn in 2014 to $5.7bn.
The performance of its flagship was not Franklin’s only problem. Its business was also largely aimed at price-sensitive individual investors with small sums to invest, rather than institutions whose much larger mandates tend to be less mobile — something the Legg Mason purchase would change.
It was also dominated by actively managed funds, where a manager oversees investments with a view to beating a benchmark index over time, just as investor money was flooding into passive products, which merely aim to mirror the performance of a benchmark and have much lower running costs.
That seemingly unstoppable trend is reflected in the swelling size of the leading passive providers. After buying Bahamian asset manager Templeton in 1992, Franklin was a similar size to Vanguard Group, the third largest investment provider in the US, with nearly $90bn in assets. Three decades later, passive specialist Vanguard has over $7.2tn in customer assets, six times the size of Franklin.
“2014 was our most profitable year ever, but it was also a tough lesson in the need for a resilient company to be diversified,” Jenny says.
Hawken picked up criticism of the approach of the firm’s leadership. “The story was, you’d spend 10 minutes on business and 30 on hockey in a 40-minute meeting,” he says.
The investment manager slipped from being one of the top players in the US market to merely being in the top 10, and then the top 20.
The family firm
Franklin is also unusual in that it is a public company with a $14.7bn market value but a high degree of family control — it has never been run by an outsider.
The company began as Franklin, a Wall Street brokerage founded by Rupert Johnson Sr in 1947 and named in honour of founding father Benjamin Franklin. It made its name with conservatively managed mutual funds, still a relatively new product in postwar America.
The family still owns 42 per cent of the stock — a stake currently valued at $6.3bn — and dominates the top jobs. In addition to Greg, her uncle Rupert Jr is vice-chair.
None of Jenny’s own children work in the business, but two of her nephews do. She says “they’ll have to prove themselves” just like any other employee.
Her father Charlie ran the company from 1957 to 2005 and although he is no longer involved in an official capacity, Jenny says he will still “circle a footnote and make a comment and send it to me”.
The dominance of the family has led some to question whether a non-Johnson will ever lead the business and what impact that has on the recruitment of top talent.
Matthew Nicholls, a British former investment banker appointed chief financial officer in early 2019, is a one of the few senior executives “who isn’t a member of the family, born into it or married,” says Hawken. “He’s the only outsider who is a part of the inside circle.”
Analysts say Nicholls is credited with halting share buybacks, which Franklin was using to support its stock, and deploying the cash for acquisitions instead.
Putting cash to work
Perhaps because of her forebears’ conservatism, Jenny says, one thing Franklin did have was spare cash. Ahead of the Legg Mason deal, it had piled up more than $8.2bn.
When she became chief operating officer in 2016, she began to play a more direct role in long-term planning. The board realised it needed to move quickly into so-called alternative investments, such as real estate and private credit, and new technology, as well as enlarging its assets under management in order to compete.
“The story started to change,” says Blostein. Once known for its caution, Franklin became one of the boldest acquirers in the industry.
Before buying Legg Mason in 2020, it picked up Benefit Street Partners, a $26bn alternative credit investment firm for $683mn. After Jenny became chief executive, it added digital wealth advisory AdvisorEngine, indexing provider O’Shaughnessy Asset Management, manager of alternative assets Lexington Partners and private credit and debt specialist Alcentra.
The firm’s assets under management grew from $717bn in 2018 to almost $1.4tn by the end of 2022.
“Those were all significant decisions that got made very quickly,” says David Manlowe, senior managing director of Benefit Street Partners.
Most of them were in alternative assets, which appeal to higher-net worth clients and deliver a specialisation that passive providers cannot offer. They also carry higher fees.
Manlowe says the company “has gone from being not really a player in alternatives to now having north of $260bn in alts. It puts us in the top 10 in the alts space.”
Across the industry, however, such products are still relatively new, have yet to achieve widescale adoption and are still cumbersome to bring to clients. “Alternatives, candidly, have not been positive for investors,” says Kunal Kapoor, chief executive of fund analytics group Morningstar. “There has been a lot of talk about more offerings . . . So far, we have not seen significant successes.”
Some critics complain that Franklin is acquiring a scattershot range of new companies, and overpaying for them. But others say it’s a strategy on its own. “Jenny by nature is someone who is willing to tinker a little bit,” Kapoor says. “She is willing to fail while trying a few different things.”
Franklin under Jenny Johnson
Asset managers tend to be wary of acquisitions, given the effect a badly executed one can have on a firm’s reputation. Integrating acquired companies is a slow and delicate process because of the fragile cultures of different investment teams.
“It’s easy to buy things; it takes 10 years to see if it’s a good fit,” Greg Johnson says. “Templeton we bought in 1992, and we’re still working on the merger.”
In a company where numerous executives boast multiple decades at the firm, the pace of change has also unsettled some. “When you take two $750bn [in assets] firms and put them together, that is going to require a certain amount of realignment,” says Terrence Murphy, head of public markets at Franklin and chief executive of ClearBridge. “The ones that didn’t adapt are no longer with the firm.”
Those that remain say Jenny Johnson’s direct communication style has encouraged debate rather than a culture of polite agreement with the family. She says it is important “that I have a management team that doesn’t shy away from that and, you know, will stand up. I like a debate”.
She adds: “When you’re number six of seven kids, you’re just trying to be heard.”
Franklin is more diversified than it was 10 years ago. But communication with clients can be a challenge given the proliferation of views within the group. “People ask, ‘What is your view on inflation?’,” says Adam Spector, managing partner of Brandywine and head of global distribution for Franklin. “Well, Brandywine has a view. Western [another Franklin affiliate] has a view. Franklin has a view. ‘We’ do not have a view.
“You often get views that are in contrast with each other. It’s not always as crisp or clean as one would like.”
A work in progress
While the acquisitions have bulked up Franklin’s assets under management, the change in the interest-rate cycle has not yet provided the expected boost for the group’s reinvention.
“The market is the biggest headwind,” Kapoor says. “ has been one of the worst years on record for global markets . . . especially in terms of flows and clients being willing to put funds to work.”
Blostein says the firm was “not positioned for the rising rate environment”, noting that it has been consistently one of the worst performers in most of its categories over the past six months.
Western Asset Management, a fixed-income specialist that Franklin acquired as part of the Legg Mason deal, suffered a year of brutal underperformance after betting that inflation would be short lived.
Many of the group’s bread-and-butter products in fixed income have also continued to struggle; the global bond fund was down 6 per cent in 2022. “It’s been extremely frustrating leading fixed income through its historically worst year ever,” says Sonal Desai, chief investment officer of Franklin’s fixed income group.
But she is hopeful that the firm is well positioned for a return to more normal market conditions for bonds. “We are well positioned for what I want from fixed income, which is the boring part,” she says, referring to the asset class’s reputation for steady returns.
The lethargy in fixed income heightens the pressures for Franklin’s new businesses to deliver results. “The alts business should grow, and they think it will grow, but it is not enough to offset the organic decay in the other parts of their business,” Blostein says.
And although inflation, rising rates and greater volatility should play into the hands of skilled stockpickers, active management has yet to see its perennially promised return to popularity, particularly with retail investors, who have grown accustomed to rock-bottom fees and long bull markets.
But this is not the first time Franklin will have faced a seismic change in the industry, nor choppy markets, Kapoor says. “There’s a group of asset managers who are starting to prioritise not just the asset management of what they do, but also on the technology of how they deliver it.”
Still, the rate of change within such an old company has been noticed. Shares in the group have risen by about a fifth since Jenny Johnson took over, ahead of the S&P 500 index and mid-tier rivals such as T Rowe Price and Janus Henderson.
The leadership changes and acquisitions took “a very boring stock that no one . . . cared about because it was viewed as a buggy-whipped company that hadn’t changed with the times”, Hawken says, “and at least made it a debate”.
Jenny Johnson now aims to settle that debate — and a separate one with sibling Greg, who now chairs the San Francisco Giants baseball team.
“I do want to point out that . . . when I was on the [Giants’] board, we won three World Series.”
Data visualisation by Chris Campbell