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SLOWDOWN: Gregory Johnson is particularly concerned about the health of the US market.

As the US economy tumbles towards recession, Franklin Resources CEO Gregory Johnson tells Andrew White how one of the world's largest publicly-traded mutual fund managers is looking to the Gulf to offset losses at home.

It's fifty-one degrees out, yet Greg Johnson doesn't break sweat as he poses for a series of photos in the blazing sunshine.

Smiling cheerfully, the CEO of mutual fund management giant Franklin Resources doesn't seem too perturbed by the temperature - but then it's probably a good thing that Johnson isn't unduly upset by a little heat.

Franklin Resources - manager of the Franklin and Templeton mutual funds - has more than 60 years of investment experience and approximately US$623bn in assets under management as of May 31, 2008.

However, as Johnson freely admits, the heat is rising as the full effects of a US economic slump are hitting the investment industry hard.

In April, Franklin Resources posted a 17% decline for the first three months of 2008 as the worldwide stock market slump triggered an exodus of investors.

Net income fell to US$366.1m, or US$1.54 a share, from US$440.9m, or US$1.73 share, a year earlier, the San Mateo, California-based company said. The company had been expected to earn US$1.76 a share, based on the average estimate of 16 analysts surveyed by Bloomberg.

"When you're a large asset management firm you're going to have periods where earnings shoot up 50%, and you're going to have periods where they drop down," says Johnson, wringing his hands.

"That's a function of the markets, and as a public entity there'll be pressure and headlines and things, but that's the normal course of business for us and nothing has changed," he insists.

Franklin Resources' assets fell 8.2% to US$591bn in the first three months of the year as investors fled stock funds on concern that global economic growth is slowing. As of last week, the firm had seen almost 20% of the value of its stock wiped off since the turn of the year.

"You know there's going to be periods where you have bumps and it's how you manage through those bumps with strategic spend and controllable costs that matters," Johnson insists.

"We've been through a very strong period and we've had a little bump in the equity markets, but the fixed income is doing very well. While this is a very real correction, it's also the normal course of business."

The correction has been dramatic. The Standard & Poor's 500 Index slumped 9.9% during the first three months of the year, the worst start to a year since 2001.

The Morgan Stanley Capital International EAFE Index declined 9.5%, while the MSCI Emerging Markets Index tumbled 11%. In total, investors pulled US$98bn from stock funds worldwide in the first quarter, according to Emerging Portfolio Fund Research in Cambridge, Massachusetts.

However, Franklin Resources has 41% of its assets in global and non-US funds, and this diversification is likely to prove a wise strategy as the US economy continues to reel towards recession. Johnson is particularly concerned for the health of his home market, and cannot hazard a guess as to when the storm clouds might clear.

"In the US it's very different from the last dip because if you look at what's driving this one, there's a longer tail on how this has to work out," he says. "The deleveraging on a global basis is something that we've never seen before at this level, so I don't think anyone can speculate what that means for asset prices over any comparative cycle.

"It hasn't happened before, it is a negative, and then if you combine that with real estate and just the psychological effect on the consumer, and then every indicator on construction and building continues to drop and that has a long lag effect on the economy," he adds. "So I think it [the slump] will be longer and deeper than a lot of people expect today."

Naturally, not all markets appear to have as bleak an immediate future as that of the US. The Gulf is one of many emerging markets posting strong growth and hence attracting the interest of US firms eager to offset their losses back home.

"I think there's real weakness in the US, but I think we see strength around the rest of the globe," insists Johnson. "A lot of the CEOs I talk to feel that there is real weakness in the US but they continue to see real strength just about everywhere else in their businesses, and I think that's what we're seeing too."

During the first quarter of the year, Franklin Resources bought a 49% stake in Vietnam's Vietcombank Fund Management to add investors in Southeast Asia's second-fastest growing economy.

Franklin Resources was also approved by the Malaysian Securities Commission to start a fund in the Southeast Asian nation, as it bids to tap into lucrative new markets.

"The Vietcombank deal was a very unique situation where it brought us into a market that is probably years away from having any real significant retail mutual fund market," says Johnson.

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