In the asset-management industry, reputation is everything.
A mutual-fund manager might have a fantastic strategy, but without a steady stream of cash flowing in to set up the position, returns may come in weaker than expected. That, in turn, could lead some investors to lose confidence that the concept was ever great in the first place.
That, in a nutshell, is what happened to Franklin Resources Inc. over the last several years. The company has been stuck near $700 billion in assets under management for the past 18 months, down from a peak of $921 billion in mid-2014, while its competitors have grown steadily.
Moody's Investors Service downgraded Franklin's credit rating in mid-2018 and last year "expressed concern that Franklin's reputation for global/international strategies and solid relative investment performance has been undermined."
That's not quite a death knell, but it's close.
What to Do?
Faced with that grim reality, Franklin made the obvious move: It got bigger in a hurry. On Tuesday, it announced an agreement to acquire asset manager Legg Mason Inc. for almost $4.5 billion.
The deal would create a $1.5 trillion behemoth whose size trails only BlackRock Inc., Vanguard Group Inc., Fidelity Investments, Capital Group Cos. and Amundi Asset Management among "independent asset managers," according to Willis Towers Watson data cited by Franklin.
It would leap ahead of Invesco Ltd and T. Rowe Price Group Inc. in this arms race. (The ranking format conspicuously excludes investing giants tied to Wall Street banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co., or those affiliated with insurers, like Allianz Group and Prudential Financial.)
At first glance, the takeaway is that the entire asset-management industry is consolidating because of the rise in passive, low-cost index funds, and Franklin's move is just the latest example.
While that's true, the combination of these two firms in particular suggests that in the current investing landscape, fund companies can either choose to be the biggest, or they can elect to remain small, nimble and specialized, but falling somewhere in the middle is purgatory.
Neither firm is accustomed to being viewed as a second- or third-tier money manager. After all, Franklin, which leans into its affiliation with one of America's iconic founding fathers, started in 1947, while Legg Mason's precursor firm dates back to the 19th century.
