By Ryan Crowther, Portfolio Manager, Franklin Bissett Investment Management
and Yan Lager, Portfolio Manager, Equity Research Analyst, Franklin Equity Group
For well over a decade, investors have focused on growth stocks: shares of companies expected to grow faster than the market average. But in recent months, the calculus has changed. Market volatility, driven by ongoing COVID-19 concerns, Russia’s invasion of Ukraine, rising interest rates and inflation, has led to a noticeable shift to value stocks. As investors focus on companies with strong fundamentals and comparatively lower-cost shares, do growth stocks still have a place in a diversified portfolio?
Financial Independence Hub: How would you describe the current landscape for growth stocks?
Yan Lager: We’ve been witnessing one of the most pronounced rotations from growth to value stocks in decades. In retrospect, following a multi-year run for growth-oriented equities that were clear beneficiaries of ultra-low interest rates, a rotation to value stocks as interest rates increase is not surprising to us.
Ryan Crowther: Looking at growth stocks generally, the terrain has become much more challenging in recent months, both in terms of the outlook for business fundamentals and a more discerning investor sentiment.
Have all growth stocks been hit equally hard?
Ryan Crowther: This is an important question, because when there’s a broad sell-off and a significant number of stocks drop sharply, they might all be considered “growth” stocks; but do they really share the same fundamentals? What risk versus return is the share price truly discounting? That’s where our GARP approach (growth at a reasonable price) has proven powerful for over 40 years, as it helps avoid focusing too much on whether a stock sits in the growth or value basket.
Which stocks have been most affected by the recent pullback in equity markets?
Yan Lager: Companies that benefited from the pandemic shift to working from home and the broader adoption of e-commerce, or persistently low interest rates, have seen their shares pull back due to profit-taking or concerns that future earnings performance may fall short of pandemic-high levels. Harder-hit stocks have included earlier-stage companies in the information technology sector, which have seen significant price and valuations fluctuations. We’re constantly reassessing the fundamental, longer-term investment theses and strategic merits of our investments.
What types of companies do you look for?
Yan Lager: In managing a global growth fund, we believe that owning a diversified portfolio of high-quality companies with strong secular growth drivers, unique competitive positions and capable management teams can deliver attractive returns, as ultimately share prices follow fundamentals. This is particularly the case if you’re investing for the long term, which we believe you should be if you’re investing in equities.
Ryan Crowther: We look for businesses with strong, consistent earnings and growing cash flow—attributes that will hopefully work to offset some of the factors that can challenge growth in the near term. In addition, a company’s valuations must also be attractive. We focus on combing through our investment opportunity set to find stocks offering a good risk-adjusted return profile over the course of an economic cycle.
Where are you finding opportunities these days?
Ryan Crowther: Focusing on mid- to large-cap Canadian companies, we’ve been active in securities that sold off as part of the broad weakness in growth stocks. We took advantage of that weakness to add new, quality companies at an attractive entry point. The shift — from the largely complacent and speculative equity market generally experienced throughout the pandemic — to the less forgiving market, characterized by a more rational mindset thus far in 2022, has created opportunities for us.
Yan Lager: Managing a concentrated, fundamental and long-term strategy, we find companies that are capitalizing on growth engines across sectors and throughout the global economy. We pride ourselves on investing in less-discovered mid- and large-cap companies beyond the high-profile mega-cap universe. This includes robotics, biotech, and cloud software companies, which represent some key drivers of the Fourth Industrial Revolution.
Should investors focus on growth or value in their portfolios? Is that the right question?
Yan Lager: While recent developments have been punitive for growth stocks, going forward we think a combination of more balanced interest rate expectations, gradually improving supply chain conditions, and post-pandemic reopenings can have a normalizing effect on the economy and create a more attractive investment landscape.
Ryan Crowther: Based on our GARP strategy, we’re always seeking companies that have secular growth tailwinds. In a perfect world, every company in our portfolio would have a clear path to top-line growth — increasing revenues and/or gross sales — over time. However, for us, growth must also translate into profitability, and of course come at a fair price. Valuations are always a key component. Consistently applying our approach has served us well over time. Despite the challenging backdrop, we believe our Canadian equity strategies are well-positioned to navigate the current environment.
What should investors be mindful of when considering the roles of growth and value stocks in their portfolios?
Yan Lager: Historically, we’ve seen strong performance coming out of periods of turmoil. Though the recent period has been challenging, our strategy has weathered other difficult periods: the Great Financial Crisis, oil over $100 a barrel in 2014, Brexit, and the onset of the pandemic, among other unexpected macro themes.
Ryan Crowther: Viewing the market through a value versus growth lens is attractive to people because it’s convenient and simple. But it’s not really going to help an investor make quality investment decisions. Even when considering a stereotypical growth or value name, if that’s all you know about the company, you haven’t truly started on the path to understanding whether it’s a good investment. Given the many cross- currents in the world today, we don’t believe a binary market view such as growth versus value is going to be particularly helpful to investors.
In our view, it’s not a question of growth versus value, but rather a confirmation that it makes sense for investors to have exposure to growth and value equities.
Franklin Global Growth Fund
This 5-star Morningstar-rated* fund invests in companies with a track record of substantial and sustainable dividend growth. Periods of market uncertainty often highlight the importance of investing in high-quality companies led by strong, experienced management. This strategy is also available as an exchange-traded fund, Franklin Global Growth Active ETF (FGGE).
Franklin Bissett Dividend Income Fund
This 4-star Morningstar-rated* fund aims to provide high current income by investing primarily in Canadian and American dividend-paying preferred and common stocks and, from time to time, bonds up to a maximum of 25% of the fund’s total assets. The fund may invest in foreign equity or fixed-income securities.
Franklin Bissett Canadian Dividend Fund
The fund seeks long-term capital appreciation by investing primarily in dividend-paying or income-producing Canadian securities, including common shares, income trust units and preferred shares. Portfolio managers look for quality companies at reasonable prices that have a proven ability to deliver a consistent and growing level of dividends over time.
*Source: Morningstar Research Inc., as of March 31, 2022. All rights reserved. The information contained herein is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and 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. The Morningstar Risk-Adjusted Rating, commonly referred to as the Star Rating, relates the risk-adjusted performance of a fund to that of its category peers and is subject to change every month. The Star Rating is a measure of a fund’s annualized historical excess return (excess is measured relative to risk-free investment in Canadian Government Treasury Bills) adjusted for the fund’s historical risk. The overall Star Rating for a fund is a weighted combination of its three, five and ten-year ratings. Overall ratings are adjusted where a fund has less than five or ten years’ history. A fund scoring in the top 10% of its fund category receives 5 stars. Franklin Global Growth Fund is rated within the Morningstar Canada Fund Global Equity category. For each of the 3, 5 and 10 year performance periods, there were in total 1,672, 1,234 and 613 funds, respectively, in the Morningstar Canada Global Equity category. A fund scoring in the top 10.1 to 22.5% 10% of its fund category receives 4 stars. Franklin Bissett Dividend Income Fund is rated within the Morningstar Canada Fund Canadian Equity Balanced category. For each of the 3, 5 and 10-year performance periods, there were in total 337, 287 and 179 funds, respectively, in the Morningstar Canada Fund Canadian Equity 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. Please refer to www.Morningstar.com for the 1-year information.
Ryan Crowther is a vice president, portfolio manager at Franklin Bissett Investment Management and has been with the organization since 2008. Mr. Crowther shares co lead manager responsibilities of the Franklin Bissett Canadian Dividend Strategies (2011), including Franklin Bissett Dividend Income Fund (2011) and Franklin Bissett Canadian Dividend Fund (2011). Mr. Crowther’s analyst responsibilities include coverage of the Information Technology, Health Care and Materials sectors. Mr. Crowther joined Franklin Bissett in 2008 as an equity analyst and was appointed to his current position in June 2011. His previous research responsibilities have included equity research coverage for the Energy Infrastructure, Utilities and Retailing sectors. Prior to joining Franklin Bissett , Mr. Crowther was a research associate and analyst at an investment boutique from 2002 to 2007, with coverage of companies in the Industrials and Materials sectors, among others. From 1999 to 2002, Mr. Crowther played a business development role in a Vancouver based internet service provider, and was a founding partner of a domain registration company. Mr. Crowther holds a bachelor of commerce from the University of British Columbia. He is a Chartered Financial Analyst (CFA) charterholder.
Yan Lager is a vice president, portfolio manager, and generalist research analyst for Franklin Equity Group covering companies across various industries. Mr. Lager was a global sector analyst covering Cyclicals companies within the team from 2005 until 2018. Prior to joining Franklin Templeton in 2005, Mr. Lager was a senior portfolio management associate at Alliance Capital Management. Previously, he was with Gabelli Asset Management. He has worked in the investment industry since 1998. Lager holds a B.S. in business administration from the College of Mount Saint Vincent and an M.B.A. in finance and management from Fordham University School of Business. He is a Chartered Financial Analyst (CFA) charterholder.
This commentary is for informational purposes only and reflects the analysis and opinions of the Franklin global equity strategy team and the Franklin Bissett Investment Management dividend strategy team as of March 31, 2022. 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. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.