Franklin Resources is the hottest of the hot

Franklin Resources Inc., whose global brand is Franklin Templeton Investments, is beating every money manager in the S&P 500 this year. The reason may be investors' disdain for equities in the United States. Franklin's (BEN) year-to-date stock price rose 14% through July 29, while the S&P 500's 11-member index of large asset managers and custody banks fell 10%. Shareholders are paying almost three times as much for every dollar that Franklin manages as they shell out for BlackRock Inc.'s (BLK) $3.7 trillion in assets, and more than four times as much than they are willing to pay for Legg Mason Inc. (LM).

SMALL BEGINNINGS

The firm, which has built itself from a family business into a global fund manager with 89% of its assets outside domestic equities, is benefiting as investors put more money into international stocks and bonds. Michael Hasenstab, Morningstar Inc.'s 2010 fixed-income manager of the year, attracted $10.9 billion through June into his Templeton Global Bond Fund Ticker:(TPINX), the most of any U.S. mutual fund, according to Morningstar. “The big shift in the last few years is, people want to diversify and maintain purchasing power. That's really where global bonds have been such a perfect fit,” said Gregory Johnson, Franklin's president and chief executive. Franklin, which has offices in more than 30 countries, saw assets grow 29% in 12 months. The firm, the fifth-largest U.S. mutual fund company, had $734.2 billion under management at midyear, including $83.6 billion in domestic equities. Industrywide, 43% of the money overseen by stock and bond managers is in U.S. equities, according to Morningstar.

'MOST GLOBAL'

“Franklin is the most global asset manager,” said Jonathan Casteleyn, an analyst at Susquehanna Financial Group LLLP. “They have the ability to search out and find the bull market.” Mutual funds that focus on U.S. equities lost an estimated $8 billion to redemptions this year through June 29, according to data from the Investment Company Institute, the fund industry's trade association. Clients poured about $104 billion into Franklin's bond funds in the two-year period ended March 31, while pulling $2.9 billion from the firm's stock funds. Franklin's stock has more than tripled since the S&P 500 fell to a 12-year low March 9, 2009. The Standard & Poor's asset-manager index has almost doubled.

MARKET PREMIUM

Stockholders are willing to pay for Franklin's breadth. The firm's premium to assets under management, used to calculate the market value for fund companies relative to their managed assets, rose to 3.1% as of March 31, according to data compiled by Bloomberg. The ratio was 1.2% for BlackRock, which became the world's biggest money manager with the $15.2 billion acquisition of Barclays Global Investors in December 2009. Legg Mason had a ratio of 0.7%. The number is calculated by subtracting tangible common equity from the company's market value and dividing by assets under management. Franklin sticks to a long-term outlook and favors countries with low debt. World bonds accounted for 43% of long-term sales and $56.5 billion in net new deposits last year. Many of its funds, including those run by Mr. Hasenstab and Mark Mobius, executive chairman of Templeton's emerging-markets group, have invested heavily in Asia. “If we get into an environment where there's massive credit risk, either rates' rising or if they get some of their investments wrong, we could see some outflows,” Mr. Casteleyn said. “The hypergrowth will come out.”

FAMILY STAKES

Mr. Johnson, 50, is the grandson of Rupert H. Johnson, who founded the firm in New York in 1947, a year after Edward C. Johnson Jr. started Fidelity Investments in Boston. The two aren't related. Rupert's son Charles B. Johnson, 78, took over as chief executive in 1957 and is now chairman. Charles's brother, Rupert Johnson Jr., 70, joined in 1965 and is vice chairman. Family members, including chief operating officer Jennifer M. Johnson, own 34% of the company's stock, worth $9.46 billion, Bloomberg data show. The shares have soared more than 4,000 times in value since Franklin's initial public offering in 1971, based on the split-adjusted price. The Johnsons don't take large salaries by industry standards, fund consultant Geoff Bobroff said. The average reported compensation for executives at Franklin is $3.58 million, compared with $7.12 million at peer companies, according to Bloomberg data.

'CASH COW'

“They tend to not make many mistakes,” Mr. Casteleyn said of the Johnsons. “They say they pay back 60% to 80% of their net income either in the form of dividends or share buybacks. It's a cash cow,” he said. Acquisitions helped fuel Franklin's growth. The firm bought investment boutique Winfield & Co. in 1973. In 1992, it acquired Templeton Galbraith & Hansberger Ltd., headed by Sir John Templeton, the fund pioneer known for international investing, and still operates overseas under the Templeton name. The company purchased the adviser to Michael Price's Mutual Series Fund Inc. in 1996 to broaden its domestic stock lineup. “Templeton has been a huge machine for Franklin in terms of gathering assets,” Mr. Bobroff said. “Franklin has tended to leave the people, at least from a money management standpoint, somewhat autonomous.”

'WHY LIMIT YOURSELF?'

A version of the Templeton Global Bond Fund based in Luxembourg attracted $5.89 billion this year through May, the most among long-term funds outside the United States, according to research firm Strategic Insight. The Templeton Global Total Return Fund Ticker:(TGTRX), also managed by Mr. Hasenstab, added the second most in deposits: $5.7 billion. Franklin's global bond assets grew to $185 billion as of June 30, from $50 billion in June 2009. “The investor has gotten more comfortable with the risks around global equities, and these markets with currency and trade strengths,” Mr. Johnson said. “Still, the average investor in the U.S. is over 50% in domestic U.S. equities, and I would argue, why limit yourself?” he said. “The U.S. economy, as we all know, is becoming less and less a factor.”

DISENCHANTED INVESTORS

Disenchantment with managers who pick U.S. stocks predates the 2008 market decline. Actively run domestic-equity mutual funds are headed for a record five straight years of withdrawals, data from the ICI show. In the 10-year period through May 31, as long-term returns stagnated, customers withdrew about $51 billion more from U.S. equity funds than they deposited. Janus Capital Group Inc. Ticker:(JNS) has had eight straight quarters of net withdrawals totaling $21.6 billion. American Funds, the family run by The Capital Group Cos. Inc., saw its $157 billion flagship Growth Fund of America lose $9.5 billion in redemptions this year through June, the most of any fund, according to Morningstar. Mr. Hasenstab, 38, who has run the $61.5 billion Global Bond fund since January 2001, held no U.S. Treasuries and kept less than 1% of the fund's assets in euro-area sovereign bonds as of March 31, favoring countries with lower debt. He held no Japanese government bonds, opting for less leveraged Asian economies. The fund, up 6.1% this year through July 29, beat 99% of its world-bond peers over the past five years, according to Morningstar. Franklin's reliance on a prominent manager such as Mr. Hasenstab is a risk because he could leave or step down, Jason Weyeneth, an analyst with Sterne Agee & Leach Inc., wrote in an e-mail. Mr. Hasenstab oversees about $155 billion, or 21% of Franklin's assets. “It's a good problem to have,” said Mr. Weyeneth, who rates the stock “buy.”