The name Franklin Resources (BEN 0.52%) probably isn't top of mind for most investors, but this financial services company is a pretty big deal. It owns both Franklin Templeton and Legg Mason, among many other companies. The stock has been hard-hit of late, pushing the yield up to a generous 4% or so. Here's what's going on and why income-focused investors might want to do a deep dive.

The core business

Through its various brands, Franklin Resources sells financial advice and financial products. It generally earns money through fees tied to the money it oversees, which is lumped together into the key industry figure assets under management (AUM). Investments are pretty sticky, so there's an annuity-like nature to the business. However, the assets it manages are largely invested in the capital markets, so the value of AUM changes every single day.

A financial advisor working with a couple in their office.

Image source: Getty Images.

As such, the fees Franklin Resources collect change, too. Normally the fluctuations aren't all that large, but when there's a bear market like there was in 2022, the numbers can be eye-catching. To put a figure on that, AUM in fiscal 2022 (which ended in September) fell 15% year over year. That's a sizable drop driven largely by declining asset values, though fearful investors also pulled funds out of the company's products. The thing is, this isn't at all shocking. It was pretty predictable because, well, it's just the way this business works. 

That doesn't stop investors from getting scared, fearing the worst is yet to come. The stock is down around 20% from its 2021 highs. The shares have recovered some in recent months, as investors appear less worried about the future, but with a 4% dividend yield, the income here is still attractive relative to the broader market, with S&P 500 Index ETFs yielding only around 1.65%. 

A changing future

Basically, when the market recovers, so too should Franklin Resources' AUM. And with that, financial performance should tick higher, as well. That said, there is a long-term headwind here. Exchange-traded funds (ETFs) are offering a low-cost alternative to the products, specifically mutual funds, that Franklin Resources has historically offered. Management is aware of this and adjusting.

For starters, it has been buying similar asset managers, like Legg Mason, to increase its scale. This helps to reduce costs and broaden its customer base. Although it wouldn't be reasonable to expect such large acquisitions on a regular basis, Franklin Resources has a long history of buying smaller asset managers. So it seems likely that consolidation will continue to be an important aspect of the company's asset-gathering approach.

The company is also moving into more attractive areas. For example, it recently bought O'Shaughnessy Asset Management, which operates separate accounts and also has a custom indexing service. That should help the company compete more effectively against ETFs. More recently, it added Alcentra to the fold, a European-based alternative asset manager. Alternative assets, such as senior secured loans, private credit, and structured credit, are part of a growing business, and this deal helps expand Franklin Resources' reach in the space. It also came with $35 billion in AUM.

Basically, the company is positioning itself for the future. And while the next few years are likely to remain difficult because of the broader shift toward lower-cost ETFs, the sticky nature of AUM and the company's efforts to change with the times suggest that it will eventually stabilize its business and, perhaps, start growing again. In the meantime, investors are getting paid well to wait out a tough market. 

The next upturn

The problem here, from an investment perspective, is that the current stock price is being depressed by the bear market's impact on AUM. That will change when the next bull comes along. So investors interested in this high-yield asset manager should think about acting now while the stock is still down from its recent highs thanks to short-term headwinds.