Franklin Re­sources pres­i­dent Jenny Johnson on the prom­ise of Saudi Ara­bia

Jenny Johnson, pres­i­dent and chief op­er­at­ing of­fi­cer of $717bn as­set man­ager Franklin Re­sources, talks mar­ket move­ments, her pos­i­tive outlook on Saudi, and why she still be­lieves in ac­tive in­vest­ment man­age­ment

Gulf Business - - FRONT PAGE - By Robert An­der­son

JENNY JOHNSON IS THE FIRST to ad­mit that her com­pany has been far from a ben­e­fi­ciary of re­cent stock mar­ket trends in her home mar­ket. While the S&P 500, which tracks US stocks, recorded its long­est rally ever ear­lier this year, ac­tively man­aged funds like those her hold­ing com­pany Franklin Re­sources (more com­monly recog­nised as Franklin Tem­ple­ton) has be­come known for have in­creas­ingly taken a back seat to their pas­sive coun­ter­parts.

“Franklin Tem­ple­ton is mostly known for ac­tive man­age­ment and its been a bit of a tough time for ac­tive man­agers, but you know the last 10 years has been a hugely mo­men­tum mar­ket,” she ex­plains on a brief stopover in Dubai for an in­vestor con­fer­ence.

“There was al­most a blind flux of money into the mar­ket in pas­sive.”

As a sign of this shift, in­vest­ment re­search firm Morn­ingstar said $692bn flowed into pas­sive funds, which typ­i­cally track a mar­ket in­dex or seg­ment, last year and $7bn flowed out of ac­tive funds - with Franklin it­self among the big­gest losers af­ter see­ing $28bn of out­flows on the ac­tive side.

This trend con­tin­ued in the third quar­ter with the most with­drawn from ac­tive funds dur­ing the pe­riod since 2011, at $86bn.

Franklin it­self saw over­all as­sets un­der man­age­ment drop 5 per cent over the last fis­cal year from $753.2bn to $717.1bn, with $38bn of net out­flows to Septem­ber 30.

But with the US Fed­eral Re­serve raising in­ter­est rates for the eighth time since 2015 in Septem­ber she says there are hopes that this trend will change.

Oc­to­ber 2018 pre­sented one of the most volatile pe­ri­ods for stocks in years with the S&P 500 see­ing its big­gest monthly de­cline since Septem­ber 2011.

“We’re al­ready start­ing to see that in the last six weeks as soon as you start to nor­malise cen­tral bank in­ter­ven­tion, you’re go­ing to see a much more nor­mal mar­ket where there is more volatil­ity and less cor­re­la­tion.”

Johnson is hop­ing this trend and other changes in the in­vest­ment land­scape can help draw in­vestors back to the fund house her grand­fa­ther Ru­pert Johnson founded in 1947.

Among the key op­por­tu­ni­ties she sees for the firm is in the emerg­ing mar­ket space, where a sell-off has taken place in re­cent months linked to fi­nan­cial is­sues in the likes of Turkey and Ar­gentina. The MSCI Emerg­ing Mar­kets In­dex, a key met­ric of EM per­for­mance, is down 16-17 per cent in year-to-date terms at the time of writ­ing.

“You look at progress in Latin Amer­ica on re­forms and some of the re­forms go­ing on in Saudi Ara­bia, as well as some mar­kets step­ping back and go­ing the other way, and so there is go­ing to be a bi­fur­ca­tion of the op­por­tu­ni­ties.”

Franklin has de­vel­oped some­thing of a name for it­self in the emerg­ing mar­ket space thanks in part to the ef­forts of the for­mer ex­ec­u­tive chair­man of Tem­ple­ton Emerg­ing Mar­kets Group, Mark Mo­bius, who left the firm in Jan­uary af­ter more than 30 years to set up his own as­set man­age­ment firm.

But even with his de­par­ture, Johnson sees the firm’s “in­vest­ment feet on the ground” across key emerg­ing mar­kets as

be­ing an ad­van­tage.

This in­cludes Franklin Tem­ple­ton’s Dubai of­fice, where it claims to have been the first as­set man­ager to es­tab­lish a pres­ence in Dubai In­ter­na­tional Fi­nan­cial Cen­tre back in 2000. Fol­low­ing the full ac­qui­si­tion of lo­cal firm Al­ge­bra Cap­i­tal at the start of 2011, the of­fice now stands at 44 peo­ple with rep­re­sen­ta­tion in the global tech­nol­ogy and sukuk prac­tices as well as emerg­ing mar­kets and pri­vate credit.

While there are no plans for fur­ther re­gional ac­qui­si­tions or new of­fices for now, the firm sees key growth op­por­tu­ni­ties in Saudi Ara­bia, de­spite re­cent set­backs linked to the killing of jour­nal­ist Ja­mal Khashoggi.

For­eign in­vestors with­drew $1.7bn from Saudi stocks in Oc­to­ber as West­ern lead­ers crit­i­cised the king­dom and pulled out of an in­vest­ment con­fer­ence over its al­leged in­volve­ment in Khashoggi’s dis­ap­pear­ance af­ter he en­tered the Saudi con­sulate in Is­tan­bul on Oc­to­ber 2. De­spite the with­drawals, Johnson says the firm has been en­cour­aged by re­cent re­forms in the king­dom rang­ing from changes to stock mar­ket rules to the lift­ing of a fe­male driv­ing ban and for­eign in­vest­ment re­stric­tions in some sec­tors.

“[When] so­cial and eco­nomic re­forms hap­pen and you have a young pop­u­la­tion you’re go­ing to end up hav­ing growth and that just is an op­por­tu­nity for our busi­ness,” she ex­plains.

Sup­port­ing this outlook have been de­ci­sions in re­cent months by mar­ket in­dex com­pil­ers FTSE Rus­sell, MSCI and S&P Dow Jones to up­grade the Saudi stock mar­ket to emerg­ing mar­ket sta­tus next year, po­ten­tially bring­ing in tens of bil­lions of dol­lars to the mar­ket.

“We think that Saudi is a grow­ing mar­ket with grow­ing po­ten­tial. The fact is with MSCI adding Saudi to the emerg­ing mar­kets in­dex we think that could be a $40bn-$50bn in­flux of cap­i­tal there, and so that of course is go­ing to buoy the mar­kets there as well.”

Johnson be­lieves these up­grades could help the king­dom and wider Gulf re­gion, which has been “punch­ing un­der its weight”, lose its per­cep­tion of be­ing solely linked to oil.

“Over time, be­ing in­cluded in the in­dex will bring more in­sti­tu­tional in­vestors to start pay­ing more at­ten­tion to the mar­ket,” she adds, while suggest­ing ex­pe­ri­ence of other emerg­ing mar­kets showed the cur­rent con­tro­versy was un­likely to be a long-term fac­tor.

“That’s the thing with emerg­ing mar­kets, you have these spikes in po­lit­i­cal ac­tiv­i­ties and that can cer­tainly slow down the flow of cap­i­tal. As it works through it can pick back up – it’s rarely a per­ma­nent im­pair­ment of cap­i­tal.”

As a sign of this pos­i­tive outlook, in June the firm an­nounced sev­eral of its funds had been made qual­i­fied in­sti­tu­tional

“[When] so­cial and eco­nomic re­forms hap­pen and you have a young pop­u­la­tion you’re go­ing to end up hav­ing growth and that just is an op­por­tu­nity for our busi­ness.”

in­vestors in Saudi Ara­bia ahead of the MSCI de­ci­sion. Just be­fore the Khashoggi con­tro­versy hit it also launched a Saud­i­fo­cussed ex­change traded fund.

The ETF, which came along­side oth­ers fo­cus­ing on South Africa and Latin Amer­ica, is part of a sur­pris­ing change in di­rec­tion for the firm, which has tra­di­tion­ally fo­cussed on ac­tively man­aged prod­ucts.

The lat­est launches bring Franklin’s to­tal to around 40 US-listed ETFs cur­rently trad­ing with fees rang­ing from 0.09 per cent to 0.39 per cent be­tween de­vel­oped and select emerg­ing mar­kets, al­though they still only rep­re­sent a rel­a­tively small per­cent­age of as­sets un­der man­age­ment.

Johnson says the firm be­lieves pas­sive and ac­tive funds both be­long in peo­ple’s port­fo­lios but in­di­cates the firm will con­tinue to favour ac­tive prod­ucts, which still rep­re­sent 85 per cent of the money held in open-ended mu­tual funds de­spite re­cent de­clines, in the fu­ture.

“Most peo­ple over the long run have twists and turns in their port­fo­lio and that’s why if you only pick one we like the choice to be ac­tive. If you have the abil­ity to have a port­fo­lio big enough to give you both then both can be ap­pro­pri­ate.”

Other moves at the com­pany this year have been linked to ac­qui­si­tions. In Jan­uary, Johnson an­nounced an agree­ment to ac­quire Ed­in­burgh Partners Lim­ited, an in­de­pen­dent fund man­ager with an AUM of $10bn.

It fol­lowed the deal with an­other in Oc­to­ber to ac­quire al­ter­na­tive credit man­ager Ben­e­fit Street Partners, which has around $26bn in AUM.

“We have one of the largest cash po­si­tions of any­body in the as­set man­age­ment busi­ness and we do that pre­cisely be­cause as op­por­tu­ni­ties ex­ist we want to have the cash to be able to ac­quire them,” she ex­plains.

Johnson says in any ac­qui­si­tion the firm looks for a cul­tural fit, which in the case of the Ed­in­burgh deal came in the form of CEO Dr Sandy Nairn, who pre­vi­ously worked for late in­vestor Sir John Tem­ple­ton at Franklin for more than a decade.

More broadly, the firm is eyeing ca­pa­bil­i­ties that will help it weather changes in the in­vest­ment land­scape.

Johnson says she has heard plenty of warn­ings of the death of the bro­ker since

“We’re a firm that re­ally has fo­cussed on diver­sity of thought, get­ting the best tal­ented peo­ple. The dan­ger in the in­dus­try has al­ways been your un­con­scious bias.” JENNY JOHNSON PRES­I­DENT AND CHIEF OP­ER­AT­ING OF­FI­CER OF FRANKLIN RE­SOURCES

join­ing in 1988 but she be­lieves hu­man fund man­agers will con­tinue to re­main part of its makeup even if tech­nol­ogy plays a larger role.

“The big­gest is­sue with un­der­per­for­mance on the re­tail client is when there is mar­ket dis­rup­tion they pull money out at the wrong time and are too slow to get back in. We are big be­liev­ers in that hu­man in­ter­ven­tion to keep them in the mar­ket is es­sen­tial to hav­ing the good re­turns,” she says.

“What we think is the tech­nol­ogy will en­able that fi­nan­cial ad­vi­sor to be ef­fi­cient.”

The fu­ture then for Franklin Tem­ple­ton ap­pears to be one where big data and an­a­lyt­ics al­low fund man­agers to make more in­formed de­ci­sions.

Johnson says a March deal to ac­quire data sci­ence in­vest­ment firm Ran­dom For­est Cap­i­tal is an ex­am­ple of the ca­pa­bil­i­ties the firm wants to bring in, namely the use of data sci­en­tists to sup­port de­ci­sions on which loan port­fo­lios to buy.

“We think it’s just one in­di­ca­tion of how data sci­ence is go­ing to be im­por­tant for any kind of ac­tive man­ager to find unique sources of in­sight lever­ag­ing the mas­sive amount of data that’s been cre­ated.”

A sim­i­lar ap­proach is planned out­side of the fixed in­come mar­ket with Franklin now es­tab­lish­ing fi­nan­cial tech­nol­ogy cen­tres where data sci­en­tists will find and an­a­lyse data us­ing ar­ti­fi­cial in­tel­li­gence to sup­port the de­ci­sions of in­vest­ment teams. One such ex­am­ple in­cludes a new of­fice in Vizag, In­dia, in which it will in­vest up to $62m and sup­port 2,500 jobs.

Johnson says these in­sights, along with a diver­sity pol­icy that has seen more than a quar­ter of lead­er­ship roles at the com­pany oc­cu­pied by women, will place Franklin Tem­ple­ton in good stead for the fu­ture.

“We’re a firm that re­ally has fo­cussed on diver­sity of thought, get­ting the best tal­ented peo­ple. The dan­ger in the in­dus­try has al­ways been your un­con­scious bias.”

And, amid ex­pec­ta­tions that the bull mar­ket in the US will con­tinue, it will be time for her firm to prove that ac­tive man­age­ment can re­turn to form.

“We tend to think there is still some op­por­tu­nity in the US mar­ket be­cause of the tax re­form and the stim­u­lus that gave. You’re ob­vi­ously long in the cy­cle here of the bull mar­ket but we still think it has some more to go.”

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