Investing ― not Speculating ― in Growth

By John P. Remmert, Franklin Global Growth Fund

Growth stocks attract a lot of attention, especially when momentum markets take share prices to heartpounding new heights. But as growth investors ourselves, we think many investors may be missing the point.

A single-minded focus on momentum is little more than speculation. If you want to invest in growth, rather than simply speculate, sustainable earnings are the key to unlocking value.

Stocks are the longest-duration assets in the capital markets. It may be several years until a stock’s value is fully realized, and as the COVID-19 pandemic has starkly reminded us, a lot can change in the meantime. We think it’s important to develop a mindset with a long time horizon and we seek to own the stocks of attractive companies that will benefit from the secular shifts that we think will shape the fortunes of businesses for many years to come.

Technology crosses all sectors

Technology is increasingly at the core of every business, not just those in the technology sector. If anything, the COVID-19 pandemic has simply sped up adoption of existing trends like ecommerce, machine learning and big data analytics. Health care, especially drug discovery, has surged forward with the rise of machine learning, like the biotech company we’ve owned for years that is now at the cutting edge of COVID-19 drug treatments with an antibody therapy that could help reduce symptoms in severely ill patients.

Within the information technology sector itself, we have invested in many US companies, as they tend to be global leaders with good corporate governance. But when we look at the pervasiveness of technology in other sectors, we find great opportunities in other countries and regions, like the South American stock we bought 10 years ago when ecommerce was non-existent; today the company is a market leader in ecommerce and has developed its own payment and shipping services to facilitate transactions.  Or the education company in China that was able to quickly move their business online when the pandemic hit, because they had been methodically investing in their online offering for years.

Supply chain links surprisingly strong

Although the pandemic and global trade tensions have put supply chains in the spotlight, in the long run, globalization still produces the best products at the cheapest price for the consumer.

While some supply chains will undoubtedly evolve and diversify (and some may fail), we think many existing supply chains will survive, including for major industrial consumer goods like automobiles.

Opportunity at the edges

Even underperforming sectors and industries can harbour intriguing long-term prospects when the focus shifts to finding ‘best in class’ opportunities that have what we feel are sustainable business models. The travel industry, for example, has been devastated by the pandemic. But if you believe, as we do, that travel for business and pleasure will recover over the next five years, the position we have been building in a Canadian simulated flight training company and leading aircraft engine manufacturer should provide exposure to the recovery with less risk and better economics than owning shares in an airline that might not survive the current pullback.

Sustainable earnings and solid balance sheets may not be glamourous, but they make for good investments — even in growth stocks.

Franklin Global Growth Fund: Growth done differently

Franklin Global Growth Fund is a high-conviction fund with a concentrated portfolio of 35-40 holdings invested in smaller-to-mid-sized companies worldwide.  It looks and performs differently than the global benchmarks and many of its peers – even during the COVID-led downturn.

Learn more about global growth opportunities at franklintempleton.ca.

John P. Remmert is a senior vice president and lead portfolio manager for the Franklin Equity Group. He is responsible for the management of global and non-U.S. institutional equity portfolios. Prior to joining Franklin Templeton in 2002, Mr. Remmert was with Citibank Global Asset Management and the U.S. Federal Reserve. He entered the financial services industry in 1987. Mr. Remmert holds an M.B.A. from the University of Chicago, a J.D. from Georgetown University, and a B.A. from Rutgers University.

This commentary reflects the analysis and opinions of the Franklin Global Growth Fund investment team as of August 10, 2020. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The commentary does not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.