FBR cuts ratings on Franklin Resources, Legg Mason

FBR Capital Markets has downgraded its ratings on the shares of asset managers Franklin Resources Inc. Ticker:(BEN) and Legg Mason Inc. Ticker:(LM), citing concerns about the future of fixed-income funds. In a report issued today, FBR said that it lowered its rating on Franklin Resources to “market perform,” from “outperform.” The company cut its outlook on Legg Mason to “underperform,” from “market perform.” FBR noted that after 23 months of net inflows into fixed-income mutual funds, bond funds saw $14 billion in net outflows in the first three weeks of December. Meanwhile, U.S. equity funds saw net inflows for the first time in 33 weeks during the week ended Dec. 31. “While one week does not indicate a trend, momentum appears to be building on the equity side,” FBR analyst Matt Snowling wrote in the report. Franklin Resources and Legg Mason rely heavily on fixed-income funds. FBR noted that fixed-income products account for 39% of Franklin's asets under management and 55% of Legg Mason's AUM. Their peer group average is 28%. “Consistent with our expectation of an investor rotation out of fixed-income mutual funds, we are lowering our ratings on the more fixed-income-concentrated managers under coverage, LM and BEN,” Mr. Snowling wrote. Some analysts, however, think that fears about fixed-income outflows are overblown. Yesterday, Sterne Agee & Leach equity analyst Jason Weyeneth upgraded Franklin to “buy,” from “neutral.” “While BEN has been the biggest beneficiary of strong retail demand for fixed-income products, we believe its global product focus and sizable global investor base make the comparison to U.S.-centric data points less relevant,” he wrote in a report, referring to the outflows from U.S. fixed-income funds. Overall, fixed-income outflows' effects on Franklin Resources were “overblown,” Mr. Weyeneth wrote. He did, however, lower earnings-per-share estimates for Franklin's 2011 and 2012 fiscal years by 3% and 7% to $7.77 and $8.69, respectively, as a result of a more “conservative view of fixed-income net flows and performance.”