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Manager maintains double-digit returns
Double-digit returns seem to be a thing of the past for many investors. But one global equity growth fund has withstood the test of time and volatility to continually deliver high returns and outperform the index.
Growth managers have continued to show their wares this year and Franklin Templeton’s $405 million (as at 30 April 2020) Franklin Global Growth Fund is a prime example, having just won Morningstar’s fund manager of the year in the global equity category.
The fund’s process applies a long-term perspective and targets high-quality stocks with strong growth prospects at attractive valuations.
Morningstar senior analyst Andrew Miles says: “The portfolio exhibits higher volatility compared with its peers and the index, but the patient approach has delivered strong risk-adjusted returns over the long term.”
The fund has performed well during the recent volatility. In the last six months, it has returned 11.49 per cent compared with the MSCI World Ex Australia index returning -2.09 per cent as at 30 April 2020.
Francyne Mu portfolio manager and analyst at Franklin Equity Group says this is due to its heavily vetted research and investment process.
“We tend to invest in companies which have been able to demonstrate strong and sustainable free cash flow generation. On average, our companies carry less debt. In a crisis, when the market is dislocated, capital and liquidity are important.
“We manage risk through ensuring there is limited economic overlap among our holdings, so as to prevent ‘dominoes’ from falling across the portfolio,” Mu says.
Over one year, the fund returned 15.16 per cent, three years returned 15.63 and five years 13.25 compared to the index returns of 3.50 per cent, 9.96 per cent and 9.05 per cent respectively.
Mu says: “The key to our process and outperformance is the research that underpins it. We can spend months looking at a name before we initiate a position in the portfolio.
“We try to understand the key profitability drivers in a company and its competitive moat. This research process also leads us into identifying companies which are earlier in their growth cycle, which if we get right, can help to achieve long-term outperformance.”
Morningstar has awarded the fund five stars and says investors can use it in their portfolio as a supporting player within a global equity section of the portfolio.
The fund lost its esteemed portfolio manager, Coleen Barbeau, and head of Franklin’s global equity team when she retired at the end of 2018.
However, the team has managed to continue strong performance when John Remmert assumed Barbeau’s investment responsibilities for all global equity portfolios and portfolio manager Don Huber supports the Australian vehicle alongside Francyne Mu.
While the departure of important staff has been problematic for a competitor, Morningstar’s Miles says the Franklin Global Growth has a talented team and remains a high-calibre option for global equities.
Miles says the fund has a notable tilt to mid-cap names as these often have a greater capacity to grow profits from a lower base.
“Only the highest-conviction ideas are included in the 35-40 stock portfolio, which pays little attention to the index.”
In order to mitigate stock-specific risk, the portfolio managers and analysts consider the correlation between individual stock earnings streams, regardless of the sector. Therefore, the fund seeks holdings with earnings streams that are largely uncorrelated.
“The analysts go beyond sector classifications to think about the source of a company’s revenue and the long-term market, economic, and demographic factors that will influence it,” Miles says.
Mu explains the team are mindful where there may be pressure points and seek to limit that economic overlap.
“In a highly concentrated portfolio, it is important to be mindful of where you may be doubling up on risk,” says Mu.
The top ten holdings include Visa, Humana, Costar Group, Danaher Corp, SVB Financial Group, HDFC Bank, Umicore SA, Salesforce.com, Verisk Analytics and Intercontinental Exchange.
Nearly a quarter of the fund is in information technology, followed by financials, consumer discretionary and industrials.
At the time of publication, the majority of the fund holdings are based in the US at around 66 per cent. The team’s research process is currently finding many compelling opportunities in the US driven by strong innovation in the information technology sector.
This is followed by Switzerland at 5.48 per cent, Belgium at 5.28 per cent and Denmark at 4.42 per cent.
The team are prepared to pay for sustainable growth considering the portfolio often has higher price ratios than the broader market. However, they will sell when the stock prices are no longer justifiable.
The portfolio turnover is relatively low sitting at 36 per cent at the end of March. This is consistent with the long-term approach of the fund and helps minimise trading costs and tax impacts.
The Franklin Global Growth Fund W share class charges a management fee of 1.13 per cent.
Miles says: “All up, Franklin Global Growth’s competitive advantage remains, thanks to a talented team, proven investment process, and inexpensive fee.”
