A Merger of Equals? Two Mediocre Fund Companies Combine

Two families with Average Parent Ratings, Franklin Templeton and Putnam Investments, to merge.

Russel Kinnel and Dan Culloton 1 June, 2023 | 9:27AM
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It’s difficult to predict how Franklin Templeton’s BEN $925 million stock and cash offer to buy Putnam Investments from Canadian insurance and asset management conglomerate Power Corp. POW will affect shareholders in the two family’s funds. The deal price, however, is quite a comedown for Putnam parent and Power subsidiary Great-West Lifeco Inc.

Great-West paid US $3.9 billion to buy Putnam from insurance broker Marsh & McLennan MMC in 2007, when the Boston-based fund family had $191 billion in assets. At the time, the fund family had been shrinking for several years and Putnam CEO Bob Reynolds and his executive team had hoped the deal would help stop the slide.

The fund family continued to contract, though, despite launching several novel strategies over the years and venturing into exchange-traded funds more recently. Putnam currently manages $136 billion in assets (including non-mutual fund assets), but the firm that was one of the top five mutual fund families in 2000 now ranks 36th after seeing steep outflows in 18 of the 23 calendar years since.

Fund company AUM

Data as of March 31, 2023. Source: Morningstar Inc. 

Putnam under Reynolds launched absolute return funds in 2008 and alternative strategies in 2017 but merged away all of them owing to anemic performance and asset growth by the first half of 2023. Since venturing into ETFs in 2021, more than half of the firm’s ETFs have less than $50 million in assets.

Overall, the firm has been lackluster in the Reynolds era, which began in 2008. It has an average star rating of 2.98 and Morningstar gives the firm an Average Parent Pillar rating. Average manager tenure hovers just under 11 years.

A bar chart showing the distribution of Morningstar Medalist ratings across fund assets managed by Putnam Investments.

Data as of May 31, 2023. Source: Morningstar Inc.

Franklin Templeton has been an acquisitive colossus. Most recently the San Mateo, CA-based firm swallowed Legg Mason. Historically, Franklin has allowed its acquired firms a fair amount of autonomy. It doesn’t often merge funds or dismiss fund managers to cut costs or improve performance. Rather, Franklin tends to leave the strong performing units alone and make subtle tweaks to processes at those that are struggling. That does not guarantee there will be no manager changes or fund mergers, but it lowers the odds.

Franklin also receives an Average Parent rating. Its average star rating is 2.87 and its average manager tenure is 10.3 years.

Franklin will pay for the deal mostly in shares of Franklin Templeton stock, and Great-West will remain a 6.2% owner of Franklin and send it some insurance assets to manage after the transaction closes. The purchase price could go up if Putnam hits various targets. Based on history, it’s an open question if it will clear those benchmarks, or if combining two average fund families can make an above-average one.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Franklin Resources Inc27.10 USD-0.62Rating
Marsh & McLennan Companies Inc200.89 USD0.29Rating
Power Corporation of Canada Shs Subord.Voting38.67 CAD0.91Rating

About Author

Russel Kinnel and Dan Culloton  Russel Kinnel is director of ratings, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He heads the North American Medalist Rating Committee, which vets the Morningstar Medalist Rating™ for funds. Dan Culloton is director, editorial, manager research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He has been the lead analyst on a number of asset managers, including BlackRock, Vanguard, Franklin Templeton, Dodge & Cox, FPA, and Davis Selected Advisors.

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