Fund neutralises style risk
Forming part of its Luxembourg SICAV range, Franklin Templeton’s recent launch of a Dynamic Growth and Value Fund is justified by the fact that over the last five years style has been the “single largest source of volatility for portfolios”, says Craig Brownell, senior vice president of Franklin Templeton Asset Strategies. Historically, extending back over a more extensive 20 year time period, it all points to the need to manage this volatility at some level for clients.
Positioned to both the institutional and retail investment marketplace, investors are able to diversify through the fund across both growth and value style investments within a global portfolio. Style risk is neutralised by adopting a contrarian ‘tilt’ mechanism that operates when each style looks set to outperform.
Although the fund is combined on a single platform, it is structured as two separately-managed, style-distinct portfolios through two of the group’s four fund management companies, Templeton Investments and Fiduciary Trust. The dedicated value manager, Templeton and growth manager Fiduciary Trust will manage the respective components accordingly.
As William Babtie, director of marketing says, “The difference here is that the Templeton and Fiduciary teams are totally isolated from each other”. He compares this to many of the big American groups who market blended products, but their offerings are borne out of one research team. “That is what does separate this particular offering. Both the companies are very true and specific to their style.” He believes this is all the more attractive given the style drift that often happens with either growth or value managers when their respective stocks are falling. It is something which consultants have found problematic. As Brownell adds, the portfolio is very diversified not just because one is growth and one is value, but from research to portfolio construction, Templeton and Fiduciary’s investment approach is extremely different.
The fund is not expected to appeal to the larger pension funds, given that they have the resources to select their growth and value managers in tandem. Babtie believes that it will appeal to pension funds with less than £100m (E000m) who would struggle otherwise to afford separate growth and value managers, particularly for those pension funds of between £50-£75m in size who wish to limit style risk, but don’t have the capability to appoint to separate managers.
For segregated funds, the minimum institutional investment will be around £20m with a £10m allocation to each side of the investment management equation. For institutional mutual funds, no specific investment allocation has been set, but it will probably be between £500,000 and £1m. “Levels of service will obviously depend on size,” says Babtie. “Someone who decides they want a mutual fund approach and has £20m will get exactly the same type of service as though they’d done it on a segregated basis.” It is important for them not to be “too hard and fast on this”. He thinks that it is an approach which will also appeal to fund of funds.
The fund has two variations, which feature a structure core and a dynamic core strategy. The former uses a 50/50 approach, adopting a disciplined rebalancing strategy where if one style grows to be 55% of the total portfolio, it will be adjusted back to an equal split. The dynamic core approach gradually tilts the portfolio to either growth or value based on a quantitative model which has been developed by Franklin Templeton internally. The model is premised on the fundamental belief, says Brownell, that even though there is a consistent pattern of style volatility and periods where either growth or value outperforms the other, the “growth and value offer similar returns over extended market periods”. As he goes on to explain, “our dynamic strategy therefore means that when one style is systematically outperforming the other to a statistically significant point we want to make an allocation to the underperforming style to capture the mean reversion”. To help manage the risk element of a contrarian type investing, momentum also features in the fund. In order to consider putting a tilt into the portfolio the momentum indicators have to be positive.
Effectively, the quantitative model removes subjectivity on when to sell and when to buy either value or growth stocks. “It’s when the numbers tell us”, comments Brownell. “It all comes back to the fundamental belief that growth and value will bring us to the same place over time”. If you’re not actively balancing, then it “all falls apart as the markets go in various directions”.
The fund will be distributed in the Europe.