2016 leaves behind much economic uncertainty, regional political tensions, an oil price roller-coaster, and monetary policies which would have been unthinkable in the past. Hence, calmness and patience were key virtues for ending the year with positive returns.
And, heading into 2017?
The Franklin Templeton Investments solution goes through three very flexible strategies, which are able to adapt to the environment as the year’s uncertainties –the Trump stimulus program, the presidential elections in France and Germany, and Brexit–unfold, and as monetary and fiscal policies gain clarity.
Franklin Strategic Income Fund
“In a world still hungry for yield, our view is that a number of fixed income sectors still represent potentially attractive income-generating opportunities, particularly on a risk-adjusted basis, despite recent volatility following the US elections,” explained Christopher Molumphy CIO at Franklin Templeton Fixed Income Group and Portfolio Manager at FTIF (Franklin Strategic Income Fund).
In the coming months, any gradual replacement of monetary stimulus with fiscal stimulus could also lead to periodic volatility. However, Franklin Templeton’s fixed income team believes that demand for income-producing securities has not diminished, and that such demand should provide support for income oriented funds. “We regard periodic volatility as a signal of healthy markets functioning normally,” explained the fund manager.
The strategy which he heads focuses on obtaining a high level of current income, with capital appreciation over the long-term as a secondary objective, and opts for fixed income and variable rate debt, which includes emerging markets. The fund uses an active asset allocation process and, under normal market conditions, invests at least 65% of its assets in US and foreign debt securities.
Diversification is achieved by seeking opportunities across the whole spectrum of investment grade and below investment grade bonds, while global bond and currency markets provide the potential for risk reduction through a combination of low-correlated sectors and strategies.
Global Multi-Asset Income Fund
The US firm’s other solution for the year is the Franklin Global Multi-Asset Income Fund, which aims to distribute a consistent level of income while maintaining potential for long-term capital appreciation. The fund aims to do this while maintaining strong downside protection and within a specified risk budget of half of the volatility of the global equity market.
Given that 46% of its assets are fixed-income, and of this, 86% are investment grade bonds, its profile is more conservative.
With a three star Morningstar rating, the fund’s Portfolio Manager, Matthias Hoppe, of Franklin Templeton Solutions, explained that “by following a sensible approach to portfolio construction and adopting a philosophy that attempts to ‘win by not losing’, we approaches 2017 optimistic about the opportunities the market offers to generate a good level of income on a risk adjusted basis.
The fund, a pure multi-asset one, invests in equities, fixed income, and alternative assets such as REITs, commodities, infrastructures and other instruments. Its regional positioning currently prefers the United States, followed by global assets and Europe in third place.
Franklin Income Fund
Heavily weighted in U.S. assets, which represent almost 80% of the portfolio, Franklin Templeton’s latest solution for income diversification is the Franklin Income Fund.
“While the pace of economic growth may remain relatively subdued, we see reasons for optimism in US and global equity markets in 2017, even as investor uncertainties over commodity prices and upward-trending US interest rates will likely persist,” said Edward Perks, CIO at Franklin Templeton Equity and Portfolio Manager for the Franklin Income Fund.
The strategy has an almost identical weight of equities than of fixed income. 46% compared to 42%, respectively. The third leg of this portfolio is the convertible bonds, which have a weight of 10%.
The main difference with the Franklin Global Multi-Asset Income Fund is that in this case most of the fixed income assets have a rating below investment grade.
“We follow a flexible, value-oriented investment philosophy seeking income and long-term capital appreciation potential by investing in dividend-paying stocks, convertible securities and bonds,” Perks summed up .
The Franklin Income Fund team believes that as the year moves forward, a stronger US economy offers a positive dynamic for many other economies and markets, “allowing for a potential shift in equity market leadership from the United States to other parts of the world,” he concluded.