Franklin Resources: Risky Pivot To Alternatives And Tokenization

Summary Franklin Resources remains rated Hold, as strategic risks in private asset democratization and tokenization offset an arguably cheap ~10x P/E valuation. Western Asset Management's AUM outflows have slowed, materially reducing downside risk; its estimated contribution to BEN operating income is now below 5%. BEN's aggressive focus on Alternative Assets has failed to deliver management fee margin expansion, raising questions about management priorities. Tokenization leadership is notable, but operational cost advantages and risk-reward for both BEN and retail investors remain highly uncertain and potentially problematic. Introduction My January 2025 review of Franklin Resources, Inc, ( BEN ) landed at a Hold rating, with downside risks relating to Western Asset Management and continued acquisition-related distractions dampening my enthusiasm for what appeared to be a very cheap valuation. BEN was trading at ~$19 when I published my January 2025 note - the stock has performed well over the last year, gaining ~35% and beating the S&P 500 by around 15%. In this note I'll begin with an update on my thoughts on Western Asset Management. I'll then go on to take a deep dive into two of BEN's main areas of strategic focus - democratization of private assets, and tokenization. I'll explain why I still think that investors should approach BEN with a degree of caution. Western Asset Management Downside Risk Update Before discussing my new concerns regarding BEN's strategy, it's worth briefly reviewing how things have played out with Western Asset Management, and reflecting upon the remaining downside risk in this regard. Based on comments by CFO Matt Nicholls in the FY24 Q&A session, Western Asset Management was then contributing ~9% of BEN's operating income, with FY24 period end AUM of $353bn representing ~21% of total BEN AUM. Clearly, as at FY24, Western Asset management was a material business in the context of the overall BEN group. My concerns regarding Western Asset Management downside risks proved to be well-founded. As summarized in Exhibit 1 below, the Western Asset Management business suffered very severe net outflows in FY25, losing $141.9bn, or ~40.2% of its opening AUM over the year. This followed net outflows of close to $49bn in FY24. Net outflows for Western Asset Management have continued in the first quarter of FY26, but at a much slower rate, with an annualized AUM loss rate of ~12.5%. I note that Western Asset Management net outflows had slowed to a relative trickle in the final month (December) of Q1 FY26, with a $1bn AUM loss for the period. Exhibit 1: Source: analyst's calculations based on BEN financial reports and monthly AUM announcements. BEN booked a -$389m intangible impairment charge in Q4 FY24 relating to acquired Western Asset Management mutual fund contracts, reducing the carrying value of these intangible assets to $650m. Given continued large Western Asset Management AUM net outflows, BEN was forced to book a further write-down of -$200m in FY25, taking the carrying value down to $450m. My expectation is that further write-downs will be required in FY26E. Whilst BEN does not include these Western Asset Management intangible write-downs in its adjusted earnings numbers, the accounting charges being made at a GAAP level should not be ignored, and are indicative of the value that has been lost due to heavy net outflows from a business that it paid a handsome price for just a few years earlier. It appears as though the worst may now be behind BEN in terms of Western Asset Management AUM loss. Cumulative outflows over the last 2.25 years have been equivalent to around 49% of Western Asset Management's FY23 closing AUM; this stands as a reminder that fund manager claims of 'sticky AUM' should always be taken with a pinch of salt. I estimate that Western Asset Management will contribute less than 5% to BEN group operating income in FY26E. As such, I no longer regard downside risk relating to Western Asset Management as overly significant to the BEN investment case. Misplaced Management Focus Reviewing BEN's FY25 materials, it is very clear that the company is focusing heavily on the Alternative Assets space. Based upon the FY25 presentation and Q&A transcript, readers would probably assume, mistakenly, that the vast majority of BEN's business is in Alternative Assets. This massive management focus on Alternative Assets strikes me as rather weird given that, as at FY25, Alternative Assets represented only 16% of BEN group AUM. An aggressive acquisition strategy over recent years designed to build up exposure to Alternative Assets and reflecting what strikes me as management's almost obsessive focus on this market segment, has failed to deliver in terms of turning BEN into an Alternative Assets juggernaut. In fact, the proportion of BEN's AUM in Alternative Assets at FY25 is 2.6% lower than the 18.5% group share reported at the end of FY23. Sell-side analysts also seem to have fallen under the Alternative Assets spell, focusing most of their questions for management around the themes of 'democratization' of private assets and tokenization. They too seem rather disinterested in the boring old equities business that makes up 41% of BEN's AUM, or the fixed interest franchise that still represents 26% of group AUM even after the Western Asset Management shrinkage. Management's FY25 commentary has little to say about the health or otherwise of the group's traditional funds management activities. I find this rather concerning, as these franchises remain the key driver of the group's financial performance and are likely to be BEN's main source of operating profit for many years to come. I'd be less concerned about BEN's Alternative Assets push if there was evidence of material positive impacts on the group's earnings. There is lots of talk about new fundraisings in Alternatives, and promising new partnerships with specialist Alternatives providers, but my sense is that the impact on group earnings from Alternatives is very low. I also note that BEN has excluded the impact of acquisition related expenses associated with the push into Alternative Assets when reporting their version of adjusted earnings. An argument for pushing more into Alternative Assets is that these market segments tend to be richer in terms of investment management fee margins. As shown in Exhibit 2, BEN's significant investments in the Alternative Assets area over recent years have not delivered investment management fee margin expansion. I note that the chart would look even worse if BEN had not lost a huge amount of relatively low margin Western Management AUM over FY24 and FY25. Exhibit 2: Source: analyst's calculations based on BEN financial reports. What's The Problem With Democratization? BEN continues to argue that wealth management clients (high net worth retail clients) ought to be allocating much more of their portfolios to Alternative Assets. The idea seems to be that if institutional level investors are willing and able to allocate around 40% of their assets to Alternative Assets, then retail clients should be encouraged to do the same. An underlying, and emotionally persuasive flavor of this 'democratization' argument is that the current system is 'unfair', and that BEN is playing its part to level up the playing field and give retail investors exposure to investments that they've previously been excluded from. Along with sales and marketing functions, BEN's Franklin Templeton Private Markets group delivers 'education'. Apparently, retail clients and the advisers whom they rely upon are set to benefit from being educated by BEN about the merits of investing in private assets (e.g private equity, private credit, real estate, infrastructure). Somehow, I doubt that this education program includes much focus on a number of rather obvious risk factors that I would argue make private assets unsuitable for the majority of retail investors. In the spirit of education, below I briefly set out my concerns regarding the democratization of private assets. I'm pretty confident that regulators in the financial sector are aware of these issues, but I'm not at all optimistic that these regulators will take the actions needed to ensure that retail investors being sold private assets products really know what they are putting their money, and potentially their retirement savings pots, into. Private asset democratization concerns: There is typically a disconnection between a product's perceived/claimed liquidity and the reality of underlying asset illiquidity. Product designs such as 'redemption gates' attempt to address this problem, but they cannot solve it. A market downturn or change in investor sentiment that triggers high volumes of redemption requests is likely to result in funds freezing redemptions. Private asset valuations are opaque. Employing external third-party valuers does not solve this problem, as their services are paid for by product issuers. There is a huge chasm in terms of reliability between 'mark-to-market' and 'mark-to-model' approaches to valuation, and retail investors are unlikely to understand this important nuance. Infrequent valuations hide the true underlying risks and allow product providers to make misleading claims regarding private equity being a lower volatility asset class. Fees are generally high, and fee structures ensure that risk/return outcomes favor product issuers over retail investors. If private credit products are accessed by retail investors through distribution platforms (which seems the likely scenario), then high management fees are compounded by additional distribution/product fees. The total after fee return for the retail investor seems unlikely to be a fair compensation for the risk taken with the investment. Retail investors do not have the resources available for due diligence that institutional investors enjoy. In reality, most retail investors rely almost entirely on a product issuer's marketing materials. Further, large institutional investors are typically able to negotiate better fee rates and product terms than retail clients (who are effectively price-takers). Similarly, retail investors are likely to have higher liquidity needs than institutional investors (patient capital). This magnifies the concern regarding the underlying illiquidity of private assets noted above. Tokenization - Get On Board The Blockchain Train If you'd said to me a decade ago that Franklin Resources would be at the forefront of technological advance in the funds management industry, I'd have fallen off my chair laughing. And yet, here we are today, with BEN striding confidently forward, leading its peer group toward a future where investment markets are entirely tokenized. The slide below (Exhibit 3) is extracted from BEN's FY25 presentation. The footnote 4 regarding projected growth of tokenized real-world assets to $18.9T by 2033 (a CAGR of 53%) refers to a BCG report from April 2025 titled 'Approaching the Tokenization Tipping Point'. I have no view as to how reliable this particular BCG report is, however, I would say that forecasts eight years ahead for any rapidly changing field are subject to a great deal of uncertainty. Although I am less bullish than BCG in this regard, I would not push back hard against the idea that tokenization is likely to be part of the financial services sector landscape in 2033 - the question is to what degree, and in what areas. Exhibit 3: Source: BEN FY25 Presentation, slide 13. In the FY25 management speech , CEO Jenny Johnson made reference to Franklin Templeton being "the only global asset manager delivering native on-chain mutual fund tokenization". She went on to say that BEN will work to "harness blockchain's potential, redefining how investors access opportunities in shaping the future of asset management". BEN's claim to be an industry leader in tokenization is certainly valid. Using its proprietary Benji Technology Platform, BEN launched the first US-registered mutual fund in 2021. This fund, with the ticker FOBXX, uses blockchain-integrated technology to process transactions and record share ownership. In 2024, BEN used the Benji platform to launch the first fully tokenized UCITS fund in Luxembourg. In 2025, BEN was granted regulatory approval to launch the first retail tokenized fund in Singapore. Impressive stuff. BEN's claim to be the only global asset manager delivering native on-chain mutual fund tokenization also appears to be technically valid, but I am not sure how material the 'native on-chain' differentiator actually is. My understanding is that other issuers of tokenized funds, such as BlackRock, have an official 'off-chain' legal record that sits behind the blockchain front end; as such, these funds can be thought of as having tokenized wrappers rather than being fully, or native, on-chain. In theory, a fully native system such as that used by BEN ought to be able to run at a lower cost that a hybrid wrapper system (as no back-up ledger is required). Also, a native system may be able to facilitate immediate trades on a 24/7 basis, whereas a hybrid wrapper method is likely to be subject to small trade delays and specified trading windows due to the need for legacy style reconciliation. BEN's approach to tokenization appears to offer advantages relative to the methods being employed by Black Rock, JPMorgan and others. The other side of this coin is that BEN's tokenization approach is riskier, as it removes that safety net that comes with the hybrid wrapper version in the form of the off-chain legal record. The marketing spin around fund tokenization is rather compelling. But as with most marketing materials, tokenization benefits are typically over-stated and tokenization risks are usually glossed over, or not mentioned at all. With tokenized funds, it really is a case of 'buyer beware'. I'd encourage anyone thinking of putting money into such products to look beyond product provider websites and fund brochures, and dig into the fund prospectus. As an example, here is a link to BEN's prospectus for FOBXX. To illustrate the importance of digging deeper on tokenized products, I'll now share a few of my findings from reviewing the FOBXX prospectus. By automating middle-office tasks such as record-keeping and dividend distribution that involve manual intervention in a traditional fund's operation, a tokenized fund should in theory be able to run at a lower cost. Some of these lower running costs can be passed on to investors. A first mover in the space may be able to leverage these lower fees to attract AUM. However, as things stand today, it is not entirely clear whether tokenization is going to deliver shareholder value for fund managers. Firstly, the true operational cost advantage of tokenized funds is difficult to identify. Secondly, if managers such as BEN simply pass through the operational savings to clients (in response to competitive tension and a desire to take market share), there will be no gain in terms of better net management fee margins. When reviewing the prospectus for FOBXX, I came across an interesting note regarding fee waivers and expense reimbursements that BEN has put in place on the product. As shown in Exhibit 4, in order to achieve an annual fund operating expense charge of 0.2%, BEN has agreed to waive or reimburse fees and expenses until July 31, 2026. I would not be at all surprised if BEN updates the FOBXX prospectus later this year and extends the waiver/reimbursement window. This discovery leads me to question the true cost operational cost advantage for BEN of its tokenized fund offer relative to its traditional fund offerings. Exhibit 4: Source: BEN FOBXX prospectus. Let's now consider the lower fee on tokenized products from the client's perspective. FOBXX is priced at around 0.2% pa to 0.3% pa lower than a comparable traditional product. The benefit to the client of that lower fee comes with a hidden cost in the form of risk. By choosing a tokenized fund, in exchange for saving 0.2% pa to 0.3% pa, the client will be moving from a tried and tested, secure, regulated system backed by decades of legal precedent, to a new system where the 'source of truth' is a piece of code on a blockchain that resides in an evolving and thus uncertain landscape in terms of regulation and taxation. For investors who are concerned about the privacy of their investment holdings and transactions, this section of the FOBXX will make sobering reading (bold text is my emphasis): The blockchain(s) used by the Fund and its transfer agent will store the complete transaction history from the issuance of the Fund's shares, and the data on the blockchain(s) is available to the public. As a result, robust and transparent data, other than shareholder personal identifying information, will be publicly available through one or more "block explorer" tools capable of displaying activity on the applicable blockchain network(s). Accordingly, the shares' issuance, transfer and redemption data (and not a shareholder's personal identifying information) will be exposed to the public. The personal identifying information necessary to associate a given share with the record owner of that share will be maintained by the Fund's transfer agent in a separate, traditional database that is not available to the public. However, if there are data security breaches resulting in theft of the information necessary to link personal identity with the shares, the stolen information could be used to determine a shareholder's identity and complete investing history in the Fund. Source: Source: BEN FOBXX prospectus. Whilst Ben's management commentary might lead investors to think that blockchain-based tozenization is about to become the funds management industry standard, the FOBXX prospectus wording suggests otherwise: Although the investment manager has experience managing mutual funds and risk oversight, blockchain based recordkeeping systems have not yet been broadly adopted by the financial services industry. On account of this, the Fund may never achieve market acceptance, may not be able to attract sizable assets or achieve scale and may discontinue the use of the transfer agent's blockchain-integrated recordkeeping system. Source: Source: BEN FOBXX prospectus. Here's a couple of other risks associated with tokenization of funds that are unlikely to make it into the marketing materials: The possibility that cryptographic or other security measures that authenticate transactions for a blockchain could be compromised, or "hacked," which could allow an attacker or unauthorized person to alter the blockchain and thereby disrupt the ability to corroborate definitive transactions recorded on the blockchain. Source: Source: BEN FOBXX prospectus. Because of the differences between the way the shares are issued and recorded as compared to shares in a traditional mutual fund, there is a risk that issues that might easily be resolved by existing law if traditional methods were involved may not be easily resolved for the shares. Source: Source: BEN FOBXX prospectus. Whilst reviewing the FOBXX prospectus, I picked up on several other tokenization-specific risks to those mentioned above. After taking all of this information in, I really must question whether it makes sense for a retail investor investing say $10,000 to take on the wide range of risks associated with tokenized funds in order to save just $20 or $30 per year in management fees. Whilst perhaps an unlikely scenario, it's worth remembering that the hacking risk associated with tokenized products could result in a total loss of an investor's funds. Closing Remarks & Rating Net outflows from Western Asset Management have now reduced the remaining AUM downside risk. Somewhat perversely, the fact that BEN's problem child is now a much smaller part of the overall group (after Western Asset Management's loss of almost $200m of AUM) has contributed to a positive ~20% re-rating of BEN's forward P/E multiple (using BEN's adjusted earnings basis). Despite this big re-rating, BEN is arguably still screening somewhat cheap, at a P/E of close to 10x. My view is that BEN's strategy in Alternative Assets is exposing the group to significant reputational risk. If the so-called democratization of private assets turns out to be yet another financial services mis-selling scandal, BEN could face serious consequences in terms of regulatory fines and/or customer remediation expenses. Frankly, I believe that risks are now rapidly mounting. Private assets are a classic example of a product/asset class that is suitable for institutional clients, but which is entirely inappropriate for retail clients. As for tokenization, I am somewhat on the fence as to whether or not this is a good idea at a conceptual level. I'm quite persuaded by the potential of the technology to deliver lower cost products, but I'm mindful that tokenization may also introduce much more risk of an operational nature. If tokenization can successfully build in the various checks and balances that traditional investment product management, operating systems and processes include today, then it may well be the future backbone of everything funds management related. Franklin Resources does not strike me as the natural owner of a business that is pushing at the boundaries of technological advancements in investment markets, although I must admit that the company has made more progress on becoming a leading player in fund tokenization than I would have anticipated. I struggle to imagine a future in which BEN makes lot of money out of its tokenization push. In the scenario that tokenization doesn't gain traction, BEN will have invested a lot of shareholder funds in what will ultimately be a white elephant. In the case that tokenization takes off, my expectation is that the cost of building and implementing tokenization systems will be much lower in future, and that BEN would enjoy a very short period of first-move advantage. In this note I've deliberately focused on BEN's ambitions to democratize private assets and to expand fund tokenization, as these feel like the main aspects of BEN's strategy that management and the market are most interested in. Looking beyond Alternative Assets, I would say that BEN's operational performance has not changed much since my last review. I remain concerned about the huge gap between BEN's adjusted operating margin and its US GAAP operating margin. Source: analyst's calculations based on BEN financial reports. Given my concerns regarding BEN's strategic focus on democratization of private assets and fund tokenization, I lack the conviction to support a Buy valuation that could otherwise be justified on purely valuation grounds. On the other hand, with the value-loss associated with Western Asset Management's problems now having mostly played out, I do not see sufficient downside risk to warrant a Sell rating. Which leaves me back where I started a year ago, with BEN rated as a Hold.