By Franklin Templeton Canada
Canadians face a lot of headwinds in this volatile investing year, including high inflation, rising interest rates, slower economic activity and geopolitical shocks. In this turbulent environment, an actively managed income strategy can help steer the way through uncertainty. Volatile markets call for a strategy that can adjust client portfolios in a timely, tactical way as market conditions shift.
Active investment management can play a key role in offering a compelling risk-reward option for investors who are looking for income, growth and overall portfolio diversification. The strategy that underlies the Franklin U.S. Monthly Income Fund is an example of an approach to seeks to give investors stability amid volatility.
“The fund has a portfolio that can make adjustments in a timely manner on your behalf,” said Rob Rocoff, Vice President, Regional Sales with Franklin Templeton Canada in Toronto. “It’s a fund that uses a flexible, balanced strategy that is capital structure agnostic and has a track record in the U.S. of over 70 years of being able to tactically adjust to volatile market conditions.”
The Franklin U.S. Monthly Income strategy aims to generate income by investing in stocks, bonds and hybrid securities, such as equity-linked notes (hybrid securities have characteristics of both stocks and bonds). The strategy’s flexible asset allocation allows it to adjust across different market cycles, including moments of high pressure, to find the most attractive investment opportunities.
The Franklin U.S. Monthly Income strategy looks throughout the capital structure for securities that offer attractive income and long-term growth potential. Top-down insights inform the investment team’s view on asset allocation, while the security selection process is driven by rigorous bottom-up fundamental research. The team focuses on investment opportunities where their fundamental views may differ from the market consensus, especially with investments in large companies.
Seeking Yield from multiple sources
As a result, the fund’s portfolio includes equities (common or preferred stocks), fixed income assets (e.g., investment grade bonds, Treasuries) or hybrids (e.g., equity-linked notes and convertibles). This mix seeks yield from multiple sources and allows for dynamic asset allocation, depending on market conditions.
This year, for example, fixed income opportunities offered more reward, as market conditions deteriorated due to the COVID-19 pandemic, high inflation and Russia’s invasion of Ukraine. In response, the investment team increased the portfolio’s total allocation to fixed income securities from 31% to 46% from December 31, 2021, to May 31, 2022, while trimming total equity exposure from 65% to 53% over the same period, to take off some risk.
“The strategy is very well diversified and defensive in its exposure to stocks,” said Mr. Rocoff, noting investor concerns about inflation and volatility. “We hold stocks of strong, reliable mega-cap businesses in this strategy.”
The results: Franklin U.S. Monthly Income Fund is rated five stars by Morningstar* and is a top decile performer across multiple time periods (see chart below). Year to date, the strategy used dynamic asset allocation to shift the portfolio where it needed to go. This helped the fund outperform the category average by more than nine percentage points in the first six months of 2022.
Franklin U.S. Monthly Income Fund Performance & Morningstar Peer Rankings
(as of June 30, 2022) for Series F
|Franklin U.S. Monthly Income Fund||-4.79%||-4.33%||2.15%||5.26%||5.37%||5.87%|
|Fund Category Average||-9.17%||-13.91%||-10.25%||1.72%||2.87%||5.22%||3.05%|
|Fund Quartile Rank||1st||1st||1st||1st||1st||1st|
|Fund Percentile Rank||1st||1st||1st||3rd||5th|
Franklin U.S. Monthly Income Fund competes in the Morningstar Global Neutral Balanced category and its Series F inception is October 3, 2016.
This Canadian fund uses the same investment strategy as the Franklin Income Fund in the U.S., which was launched in 1948. Such longevity is testament to its active management, which has allowed the fund to provide stable income and capital growth through changing interest-rate environments over more than eight decades.
The Franklin U.S. Monthly Income strategy can be defensive when necessary but also opportunistic when markets present the right conditions. The investment team, headed by Lead Portfolio Manager Ed Perks in San Mateo, California, is a veteran unit with many years of experience and which is supported by Franklin Templeton’s global research capabilities. This solution has a track record of consistent income payouts since its inception in Canada in 2013.
“For investors looking for income and growth, the Franklin U.S. Monthly Income strategy offers a consistent and stable option for investors in uncertain times,” said Mr. Rocoff.
* Source: As of June 30, 2022. © 2022 Morningstar Research Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating TM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Ratings metrics. The weights are 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three- year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Franklin U.S Monthly Income Fund is rated within the Morningstar Global Neutral Balanced category. All performance data refers to Series F units. Please refer to www.morningstar.ca for more details on the calculation of Morningstar Risk-Adjusted Ratings and the one-year information. For each of the 1-year, 3-year and 5-year performance periods, there were in total 1,470, 1,272 and 1,004 funds, respectively, in Morningstar Global Neutral Balanced category. All ranking data refers to Series F units and is subject to change every month.
Morningstar decile and quartile rankings show how well a fund has performed compared to all other funds in its peer group. Each fund within a peer group is ranked based on its performance, and these rankings are broken into quarters or quartiles. Within a group, the top 25% (or quarter) of the funds are in the first quartile, the next 25% are in the second quartile, the next group in the third quartile, and the bottom 25% of funds with the poorest relative performance are in the fourth quartile. The point in which half the funds had better performance and half had worse performance is the median. If 100 funds are being compared, there would be four quartiles of twenty-five funds each. The median would be the fiftieth fund. For more details on the calculation of Morningstar star ratings or quartile rankings please, see www.morningstar.ca. © Morningstar Inc. All Rights Reserved.
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Templeton Canada is a business name used by Franklin Templeton Corp.