Franklin Templeton is on track to end 2020 as one of the worst-selling retail asset managers after investors pulled money from its funds ahead of its landmark takeover of rival Legg Mason.

The US group has suffered the highest year-to-date outflows of any fund house globally in 2020, bleeding a net $41.6bn, according to data company Morningstar.

The figures, which include money market and exchange traded funds, but exclude institutional mandates, make January to September this year Franklin Templeton’s highest period of outflows in four years. It lost $36.7bn last year, $41.3bn in 2018 and $27.7bn in 2017.

The flow numbers incorporate data for both Franklin Templeton and Legg Mason following the closing of the acquisition in July.

The investor withdrawals come at a time of upheaval for Franklin Templeton. This year, a new chief executive took the helm, and the company soon afterwards struck a $6.5bn deal to buy Legg Mason, taking its assets above $1tn.

The coronavirus market shock also hit Franklin Templeton, with heavy redemptions from its Indian mutual funds forcing it to liquidate six funds managing $3bn of assets.

“Franklin Templeton has not escaped its outflow problems,” said Morningstar analyst Karin Anderson.

While outflows have plagued the company for the past six consecutive years, the increased rate of redemptions this year underscores the challenges ahead for new chief Jennifer Johnson as she integrates Legg Mason and sets the newly combined group on a path to growth.

Amin Rajan, chief executive of consultancy Create-Research, said the latest outflows demonstrated that investors expected a tumultuous integration process.

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“Crunching the two businesses together will be challenging, especially since they have very different business models,” he said. “Fearing that the integration phase will be far from smooth, investors have pulled their money and hurt the performance.”

The experience of previous mergers, such as those that created Standard Life Aberdeen and Janus Henderson, will be fresh in investors’ minds, casting doubt over the value of megadeals for clients, said Mr Rajan.

Franklin Templeton said its outflows were mainly linked to the weak performance of certain large strategies, which was “not abnormal in a momentum-driven market”. It pointed to positive flows to strategies including its US opportunity, technology and innovation funds.

The company added that client reaction to the Legg Mason deal had been positive. “We have not experienced outflows as a result of the combination,” it said.

Morningstar’s Ms Anderson said the Legg Mason deal had the potential to help Franklin Templeton expand its institutional book of business, creating a more stable client base that could improve its flows.

But she warned that investors would want to see that Franklin was allowing Legg Mason’s affiliates, including fixed-income specialist Western Asset Management, to operate autonomously and stick to their investment philosophies. “There is no guarantee that any acquisition is going to be a quick fix,” she added.

The Legg Mason takeover is far from the only challenge facing the group. “It’s in large part a product story,” said Chris Chancellor, senior director at Broadridge, noting that two flagship bond funds run by veteran fixed-income investor Michael Hasenstab continued to account for the bulk of the company’s outflows.

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Meanwhile, the fund group’s net inflows have also been weak, with its most popular product in Europe, Franklin Technology, bringing in €1.4bn year to date, making it only the 55th best-selling fund in the region, said Philip Kalus, managing partner of consultancy Accelerando Associates.

Via Financial Times