WISER IF NOT WEALTHIER, FRANKLIN FINALLY LOOKING HEALTHIER: VALUE, INTERNATIONAL OFFERINGS LEAD PEERS; GROWTH FUNDS ON TAP

What happens when a mutual fund company stubbornly adheres to its investment philosophies? Ask the managers at Franklin Resources Inc.

Last year when their international and value investment styles became about as fashionable as smoking in a California bar, they watched as shareholders drained $1.6 billion from the San Mateo, Calif.-based fund company, the country’s fifth-largest with $227.5 billion in assets.

“When a style is out of favor it’s frustrating,” Peter Langerman, the head of Franklin’s Mutual Series funds, acknowledged back in January. He added, however, “That’s also when we create the portfolio that will generate nice gains for the next couple of years.”

Sticking to one’s guns has currently launched Franklin’s value-conscious Mutual Series and Templeton international funds to the top of their peer classes. Year-to-date, Templeton Foreign and Growth funds are up 19.9% and 21.0%, respectively, compared to the average international fund return of 7.6%. Templeton Developing Markets fund is up even more, 37.9%, compared to its peer average of 29.1%, according to Morningstar Inc.

Last year, the three funds had dismal returns — -4.9%, -2.5% and -18.7%.

Things at Short Hills, N.J.-based Mutual Series are looking considerably brighter, too. Whereas the group’s five mutual funds returned 11.5% collectively last year, each is currently returning between 10% and 15%. Their value peers are returning an average 5.2%.

The resurgence is reflected in Franklin’s stock price. Trading at just $27.50 in early April, the stock has since leapt to around $40, as value investing and foreign markets have rebounded.

That’s good news for the acquisitive Franklin, which could use the extra currency to gobble up competitors. At the very least, it makes Franklin a more expensive takeover target.

Whether the markets will remain favorable long enough to push the stock back to its 52-week high of $56 is another question.

“It’s too soon to take victory laps,” cautions Mr. Langerman. “But we stick to our discipline in good times and not-so-good times.”

The resurgence feels “somewhat vindicating,” J. Mark Mobius, Templeton’s dean of emerging markets, says with a smile. “I’m really happy that emerging markets are enjoying a turnaround.”

Yet he warns that in Asian emerging markets, “fast talks of reform are already going out the window. People are saying, ‘Happy days are here again.’ It’s business as usual.”

Mark Holowesko, manager of the Templeton Foreign and Growth funds, shares Mr. Mobius’ concerns about particular markets like those of Thailand and Singapore, which he says may have “come up too far, too fast.”

four- or five-year horizon

Still, says Mr. Holowesko, whose funds are more heavily weighted in Europe and Hong Kong, “if they correct slightly here in the short run, I don’t care. I’m buying stocks to hold four or five years.”

Meanwhile, Greg Johnson, who heads Franklin’s distribution arm, insists the company isn’t overly concerned about its stocks’ movement.

“It’s going to trade up and down,” says the son of Franklin president Charles Johnson. “I think the volatility in terms of how it sold off (last year) was a bit overdone. But that’s the nature of the money management business.”

Industry watchers say the stocks’ performance this year and next will depend on how adeptly Franklin deals with continuing expense pressures.

Three areas expected to grow in cost are advertising, compensation, and technology — areas in which the company squeezed costs last year, explains Bruce Brewington, general equity analyst at Putnam Lovell deGuardiola & Thornton in San Francisco.

Mr. Brewington also cautions that Franklin’s deteriorating sales last year led to a decline in underwriting revenue of 35%, slicing profit margins.

“We’re always trying to be more efficient,” counters Mr. Johnson. “But at the end of the day, we need to provide the best level of service possible, and you don’t do that by managing your expense line.”

Of course, another major concern for investors has been redemptions. In the first quarter of this year, they were worse than all of 1998: $7.3 billion, according to Financial Research Corp. in Boston.

In contrast, the company enjoyed net flows of $3 billion in last year’s first quarter.

But redemptions have slowed markedly since March, according to Mr. Johnson, who won’t discuss specific figures. In fact, he says, assets were up $11.5 billion in April alone.

Equity analyst Edward McRedmond of St. Louis-based A.G. Edwards says he’s not surprised. “Franklin caught a lot of flak last year, but their philosophy not to try picking the bottom of a market is paying off.”

“Because they built up their positions when everyone else built up their cash, Franklin is enjoying the full benefit of value and emerging market recoveries while others are scrambling a bit,” he adds.

Others aren’t so sanguine. Investment adviser Tom Swift, vice president of Horton Investment Advisory in San Francisco says he’s lost all interest in Franklin. “I’m looking for more consistency.”

Still, Franklin appears to be on track once again. And this time, just in case, the company is launching large-cap and aggressive growth funds next month under the Franklin name.

It’s a somewhat surprising departure for one of the biggest names in value investing. But Mr. Johnson says management has learned a lesson from the past two years.

“Value can cover a lot of things,” he says. “We don’t even like to refer to ourselves necessarily as value investors. We don’t want to be caught in a situation where you have one sector that does really well and you don’t have something in the fund family to meet that demand.”

Not a second time, at least.