UPDATE 2-Franklin Resources profit higher, but costs rising

* EPS $1.60; Street view $1.33

* Funds take in $12.2 billion in net new money

* Shares down 3 pct amid worries about costs (Adds details on revenue, costs, stock move, byline)

By Svea Herbst-Bayliss

BOSTON, Oct 27 (Reuters) - Franklin Resources Inc (BEN.N), one of the largest publicly traded U.S. mutual fund companies, reported a stronger-than-expected 22 percent rise in quarterly profit on Tuesday, but higher costs weighed on its shares.

Strong demand for Franklin's portfolios, especially its international debt funds, helped the company take in $12.2 billion in the quarter, significantly more than any of its rivals.

But rising expenses, for things like advertising, distribution, compensation and benefits, helped send Franklin shares down 3 percent, analysts said. Most other asset managers were also lower.

"The expenses were higher," said Donald Neiman, analyst at William Blair & Co. "Things are getting more competitive, and to retain the best people you have to pay them."

San Mateo, California-based Franklin said net income rose to $367.4 million, or $1.60 per share, for the fiscal fourth quarter ended Sept. 30, from $300.5 million, or $1.28 per share, a year earlier.

Analysts' average forecast was $1.33 per share, according to Thomson Reuters I/B/E/S.

Franklin, which manages the popular Franklin and Templeton mutual funds, said assets under management, which helps determine how much money managers earn in fees, grew to $523.4 billion from $507.3 billion a year earlier.

The company took in $12.2 billion in new money in the quarter, more than twice the amount it took in during the previous quarter. Heavy inflows allowed Franklin to distinguish itself from competitors like BlackRock Inc (BLK.N) and Legg Mason Inc (LM.N), which suffered outflows.

Less than a year after the financial crisis, still-skittish investors preferred the safety of bond funds and added $8.6 billion to Franklin's global/international taxable fixed income funds.

"Fixed income has been the driver, and they should get credit for that," said William Blair & Co's Neiman.

Operating revenue fell 6 percent to $1.24 billion but were up 15 percent from the previous quarter.

Operating expenses rose 14 percent from the previous quarter to $854.2 million, boosted by a 34 percent jump in advertising costs and a 19 percent rise in underwriting and distribution costs.

Compensation and benefits costs rose 7 percent from the previous quarter to $246.8 million.

Franklin shares, which have outperformed many rivals with a 77 percent gain this year, were down $3.45 to $109.57 in midday trade on the New York Stock Exchange. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick)