Separately managed accounts have become the hip product in the financial services industry in the past few years, with many traditional mutual fund firms now looking to penetrate the space. But one fund firm, Franklin Templeton, has been at it for years, and its deep distribution relationships and product breadth has enabled the company to garner $4.65 billion in assets. Money Management Executive Associate Editor Kevin Burke sat down with Franklin Templeton Private Client Group President and Chief Executive Officer Kent Strazza to talk about how his firm's experience in the field and strong fixed-income reputation enables Franklin to deliver a quality managed account product.
MME: Many mutual fund firms have come into the managed account space in the last few years. Your firm, however, has been there since 1979. Does that give you a tactical advantage?
Strazza: Being in this space for some time now does offer us an advantage. It all started with Templeton and Franklin getting into the managed account area concurrently but not really working that closely together. Franklin built its business in the domestic equity and fixed-income, true wrap environment, where we had several sponsors help us promote our products in the wrap space. Templeton, on the other hand, built its business more on the larger separate accounts by going after quasi-institutional accounts with international and global portfolios. And at that point they really only had one major sponsor and one corporate dealer they were working with.
The first thing we did was merge the sales and marketing forces. We've always kept the portfolio management intact and separate at Templeton. We've got quite a portfolio and analyst infrastructure. Although we have portfolio managers dedicated to the private client group, they work with the analysts and the portfolio managers throughout the firm. One of the benefits of being in the business so long is we've been able to develop quite a bit of product, from international and global all the way up the fixed income side. We're starting to combine products now.
So, it was more of a sales and marketing merger. Because we've been in the business for a while, one of the things that has helped us has been deep distribution and a dedicated sales force.
There was also an opportunity to integrate a lot of the operations - the account servicing, not so much the trading, but a lot of the back-office work. Once we merged these two entities, we were able to leverage the infrastructure from both organizations. It's a tough business, and the margins can be thin at times, but we've built ours into critical mass. Therefore, we're able to leverage up some of these resources and do some things on the distribution side.
MME: Would you say your background is more on the mutual fund side or the wrap account side?
Strazza: I came through the ranks at Franklin, starting in 1984 on the mutual fund side. While I've always had a role in sales and sales management, most recently, I ran the defined contribution bundled 401(k) business, which got me into some of the operational aspects of the business. In 2001, they asked me to come on board to merge Templeton Portfolio Advisor and Franklin into one distribution and marketing arm.
MME: Is the SMA space getting too crowded? Is there room for mutual funds to come in now and carve out a niche for themselves?
Strazza: I think the competition is good for the end client. I think there's going to be more products, more choices and hopefully better performance long term. If there are more managers and more sponsors speaking about managed accounts, I think it will also help the industry realize its potential for growth.
I have a lot of respect for the due diligence process at the major firms, the people who have to screen and approve managers and products. I greatly respect what they do, but I hope that it doesn't put too much pressure on them. I'm also a little concerned about new entrants getting into this space to try building better critical mass. Maybe they're willing to accept lower minimums or accept lower fees, which I would be concerned about long-term.
MME: What level of client are your products suited for?
Strazza: Generally speaking, we target the high-net-worth and the mid-size institutional-client - pension plans, endowments, foundations. We view the financial adviser as our customer. Templeton built a lot of their business around that end of the market. And we do a lot of small-cap business, where you get maybe 10% or 20% of an allocation from a high-net-worth client. We also do a lot of business on the muni side.
MME: How and where will you distribute your product?
Strazza: The majority of our distribution has been through the major wirehouse firms, but our strategy is to work with all the distribution channels. We have, just like the rest of the industry, seen a lot of the regional firms and some of the financial-planning and third-party firms start to pick up market share.
Like I said, we have a dedicated sales force and internal support team for the private-client group, but they team up very closely with our mutual fund people on the wirehouse side as well as the financial planning firms to help us distribute in some of these other distribution channels.
MME: What are some of the operational challenges in delivering your product?
Strazza: Because we've been doing it for quite a while, I think we have some very strong infrastructure. I feel confident that we run our operation as well as almost anybody, but there are industry issues and challenges. I've read some of your other pieces, so I know that you're well aware of them.
For one, there are really no operational standards. Whether it's across the managers or across the sponsors, we seem to be where mutual funds were back in the late 70s or early 80s.
The Money Management Institute, on whose board I serve, is trying to get its arms around this thing by introducing some standards. I think they've done a really good job getting sponsors and managers together. There is the danger we're not going to realize the huge potential in this marketplace. Everybody agrees it's going to grow and grow rapidly, but for that to happen, we need to make sure that the processing in the back office can keep up with the demand. I give the MMI a lot of credit for trying to work through some of these issues.
MME: Why are you so heavily weighted in the fixed income area?
Strazza: I think it's primarily due to demand in the marketplace. Last year was one of the best years ever for our muni and fixed income products. We were very fortunate and glad to have these offerings because we were able to raise a lot of assets - and our market share. But I think that many people equate Franklin, rightfully or wrongfully, as a fixed income manager. It is certainly one of our strengths. Fixed income was one of the first products that we introduced in the marketplace when we first got into this business. So, we have deep penetration in the major sponsor firms with the muni products, and there's high demand. They have won us incremental business for our private client group.
MME: Have you recently added any new products to your lineup? If not, are there any coming down the pipeline?
Strazza: The global equity all-cap that I mentioned kind of fits in that multiple-disciplinary-account type model. We took half the portfolios managed by Fiduciary Trust, which is a global growth manager, and half the portfolios managed by Templeton, which is a global value manager, combined the portfolio and created one model. There's an oversight committee managing it, including the two portfolio managers, but all the operations and all the infrastructure and the trading is done down in Fort Lauderdale. So, it's a very simple product but it suits a need in the marketplace and we've been able to get some attention for it. We're exploring other MDA-type opportunities.
We're very fortunate because we have Franklin, known for domestic equity and fixed income. Templeton, of course, is best known for its international and global investments, and Fiduciary for income and international growth. So we're looking at ways of piecing these three organizations together and creating a unique product. But if we do that, it's got to be relatively simple, easy to understand, easy to distribute and most importantly easy to administer.
Some of the other products that we specifically have introduced are Small/Mid Cap Value and Small/Mid Cap Growth. We think that there's demand in that space especially as small cap managers are closing down, whether it's on the value side or the growth side. It's kind of an easy transaction in the marketplace to say, O.K., we've managed some small cap before, we've managed some mid cap, so we've created kind of an overall small/mid cap strategy.
The other thing that we've heard some demand for is all-cap strategies. I know there are firms that have introduced all-cap value, all-cap core and all-cap growth. We've developed some of those capabilities as well and are starting to introduce those to the marketplace.
Finally, I would say that Fiduciary Trust has some nice fixed-income strategies for the high-end, high-net-worth and institutional-type client that we've integrated into our distribution efforts. So, small/mid cap value, small/mid cap growth, global equity all cap, and Fiduciary's fixed-income offerings, are some of the products that we've most recently been speaking to sponsors about.
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