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Franklin Resources' strengths turn troublesome

Some of the very reasons that made Franklin Resources seem destined for success earlier in the year, have caused the fund group to fall even harder than some of its counterparts in the market downturn.

While Franklin Resources' acquisition of the Templeton Group in 1992 was seen as a coup in that it brought Franklin a large group of international funds, the combined company has suffered as international markets have turned down even more sharply than U.S. markets. And, although Franklin Resources had been admired for being able to command some of the highest fees in the industry, it is now possible that its fees have made investors flee particularly quickly as the market has turned bearish.

As recently as April of this year, Morgan Stanley Dean Witter had rated Franklin Resources "Outperform."

But, on June 22, Morgan Stanley analyst Henry McVey downgraded the company to "neutral" and on Sept. 18, Standard & Poor's revised the outlook of Franklin Resources to stable from positive. The company has also recently said it will not grant standard pay increases next year and that it is hesitating to expand its work force.

One of the company's main vulnerabilities is the fact that 46 percent of its assets are held in its international subsidiary, Templeton, McVey wrote in his June report on Franklin. He also said Franklin could suffer a setback because it is increasingly relying on deferred sales commissions and plans to sell back-end loaded products through banks by December. Back-end load products generally carry a 4 percent to 5.50 percent upfront payment, substantially more than the one percent level load product Franklin generally sells in the U.S. Meanwhile, all fund companies, including Franklin, are likely to see their revenue from 12-b1 fees diminishes along with a shrinkage in assets due to the market downturn. Yet another source of weakness is the fact that despite the poor performance of international funds, there is a growing number of them.

Franklin's high fees which resulted at least in part from its merger with Templeton, have also probably hurt the company in the downturn, analysts said.

One drawback of Franklin's mergers was that "Franklin had to pay a lot to get Templeton and Mutual Series Funds," said Russ Kinnel, equity fund editor of Morningstar Mutual Funds, Chicago, in April. Although he acknowledged that high fees can hurt a company, particularly when the market is bearish, Peter Jones, executive vice president of Franklin-Templeton Distributors said the company had no plans to change its fees.