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Wednesday, October 11, 2006

Analyzing Franklin Resources (BEN)

By Yaser Anwar, CSC of Equity Investment Ideas

BEN reported better than expected September-end AuM of $511.3 bn compared to our $508 bn forecast. The month saw a +104 bp MoM increase for Total Equities, an +88 bp MoM in global, and hybrid, which includes the $40 billion+ Franklin Income Series fund, one of the largest inflowing Franklin Templeton funds recorded a +191 bp MoM gain.

BEN's broad product offerings, dominated by value and global investment strategies, have contributed to strong relative investment performance. Alongside continued focus on customer service, BEN has generated a loyal following among its clients and the financial advisers who recommend and distribute its funds.

The September data point marks a slight moderation in the rate of change. BEN's AuM +113 bp MoM vs a +227 bp increase last month. Despite its acquisitive history, I think BEN's management favors organic growth.

The interests of BEN's management are closely aligned with those of shareholders given that directors, director nominees and executive officers as a group owned about 35% of the outstanding float, always a positive sign. Overall growth in AuM was greater than expected, hence I expect it to outperform its peers.

I believe BEN will continue to outperform the asset management sector given improving fund flows, a strong balance sheet and ability to use its excess cash to buy back shares and potentially make acquisitions.

I believe strong overall international fund flows will drive overall AuM growth at a faster than average rate.

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