Franklin Resources: Navigating Fixed-Income Headwinds to Unlock Turnaround Potential

Franklin Resources (NYSE:BEN) has long been a bellwether in the asset management sector, but its recent struggles with Western Asset Management Company (WAMCO) cast a shadow over its growth narrative. Now, analysts at TD Cowen have reignited optimism by upgrading their price target to $28 from $27, citing stabilizing outflows at WAMCO and a robust institutional pipeline. This move underscores a critical inflection point for the firm—one that investors should scrutinize for its underappreciated risk-reward profile.

The Catalysts Fueling TD Cowen's Optimism

At the heart of Franklin's turnaround is the stabilization of WAMCO, its beleaguered fixed-income subsidiary. After years of outflows—$10 billion in April alone—TD Cowen notes that attrition has slowed faster than expected. This pivot is critical because WAMCO's performance has been the primary drag on Franklin's adjusted operating income, which fell 8.6% sequentially in Q2. However, the firm's broader business segments are showing resilience:

1. ETF Growth Surge: Franklin's ETF business hit a record $37 billion in assets under management (AUM) in Q2, with $4.1 billion in net inflows. This marks the 14th consecutive quarter of positive net flows for the segment, a testament to its strategic pivot toward lower-cost, liquid products.
   

   

2. Institutional Pipeline Strength: The institutional one-but-unfunded pipeline swelled to $20.4 billion—a post-2022 high—suggesting strong demand for Franklin's active equity and alternative strategies. Additionally, the launch of its first perpetual secondaries private equity fund, which raised $2 billion, signals expansion into high-margin alternatives.

3. Macro Tailwinds: TD Cowen's June 4 thematic report positioned Franklin to benefit from investor shifts toward multi-asset strategies and active management, particularly in a volatile macro environment. This aligns with Franklin's strengths in global equity and alternatives.

The Elephant in the Room: WAMCO's Lingering Challenges

While optimism is justified, Franklin's fixed-income segment remains a double-edged sword. Total long-term net outflows hit $26.2 billion in Q2, with WAMCO alone accounting for $30.5 billion in fixed-income outflows. Excluding WAMCO, however, Franklin's fixed-income business posted $2.8 billion in inflows—a sign that core competencies remain intact.

The key question is whether WAMCO's runoff will continue to decelerate. TD Cowen argues that if outflows stabilize further, Franklin could see upward revisions to its $30 price target. Yet, the firm's Q2 operating income drop—a function of WAMCO-related costs and compensation expenses—reminds investors that near-term pain may precede long-term gain.

Strategic Moves to Watch

Franklin's management has been proactive in addressing headwinds:
- Putnam ETF Conversions: The planned transition of 10 Putnam municipal bond funds into ETFs by early 2026 aims to reduce distribution costs and attract passive investors.
- Dividend Resilience: Despite operating pressures, Franklin maintained its $0.32 quarterly dividend (a 3.2% increase), offering a 5.77% yield—a rare perk in an asset management sector plagued by stagnant payouts.
- Leadership Shuffles: The appointment of Surajit Ray as Head of Portfolio Construction underscores a push to modernize quantitative risk capabilities, critical for competing in a data-driven market.

Risk-Reward Analysis: Why the Market Is Missing the Boat

The broader market remains skeptical. Analysts' average price target of $20.60 (a 16.7% downside from current levels) reflects lingering doubts about WAMCO's turnaround. Yet, TD Cowen's bullish stance hinges on three underappreciated factors:

1. ETF and Alternatives Flywheel: Franklin's $37 billion ETF AUM and $6.8 billion in alternatives fundraising are not yet fully priced in. These segments carry higher fee retention and less sensitivity to interest-rate volatility.
2. Pipeline Execution: The $20.4 billion institutional pipeline, if converted, could add ~$150 million to annual earnings—a material boost.
3. Valuation Discount: At $22.69, Franklin trades at a 15% discount to its five-year average P/B ratio, despite its dividend yield and improving fundamentals.

Investment Thesis: A High-Reward, High-Risk Gamble

Franklin's stock offers a compelling asymmetry: upside potential of ~23% (to TD Cowen's $28 target) versus downside risks tied to WAMCO's volatility and macro uncertainty.

Buy Signal: Investors with a 12–18 month horizon might consider a position at current levels, particularly given the dividend yield and ETF-driven growth. A stop-loss below $20 could mitigate WAMCO-related setbacks. Historical performance supports this approach: a backtest of buying Franklin Resources on its quarterly earnings announcement dates and holding for 60 trading days from 2020 to 2025 produced an annualized return of 14.76%, outperforming the benchmark by 0.74% with a Sharpe ratio of 0.50, indicating reasonable risk-adjusted returns.

Hold Signal: Short-term traders should remain cautious. Near-term catalysts—such as WAMCO outflow data in Q3 and ETF conversion progress—are needed to validate the turnaround narrative.

Final Take

Franklin Resources is a classic “turnaround story” with uneven execution. TD Cowen's price target upgrade highlights a plausible path to recovery, but investors must weigh the risks of further WAMCO turbulence. For those willing to bet on Franklin's strategic pivots and valuation discount, the reward could outweigh the risks—but patience will be required.