Franklin Templeton’s flagship global and international equity funds remain less popular than its fixed income and balanced products, largely because of concerns over the eurozone crisis.
But the US firm's global equities investment head feels that there are great opportunities out there, particularly in Europe, at present depressed valuations.
“It will be a long grind to get Europe out of its malaise, and that’s scaring people away from equities,” says Norman Boersma, chief investment officer of the global equity group (GEG). He is portfolio manager for the group’s flagship fund, the Templeton Growth Fund, and his team manages around $100 billion in assets.
“We will be first to admit that the recent market environment has been challenging for long-term fundamental value investors,” said Boersma during a trip to Asia this month.
With equity correlations and beta in global markets high as at the end of the second quarter, global share prices recently seem far less influenced by underlying business fundamentals than they are historically, he adds.
“Should investors continue to value companies by their short-term resilience instead of their long-term earnings and yield potential, fundamental-value strategies could face additional headwinds in the near term,” says Boersma.
“Yet valuation and yield support remains encouraging and, historically, stocks have gone on from such depressed multiples to enjoy considerable long-term gains.”
The GEG is unusual for Franklin Templeton in that its assets are fairly evenly split between the institutional and retail segments, he says, whereas the typical ratio at the fund house includes a higher proportion of institutional money.
Yet the proportion of retail AUM in the firm’s equity funds has been falling this year, given the pervading negative sentiment, particularly around equities. Institutional investors, however, tend to be more disciplined about staying put, notes Boersma.
So where should allocators be looking for the best value? Europe is among the best options, says Heather Arnold, London-based director of research in the GEG (pictured below).
Pretty much everything has sold off in Europe this year, aside from healthcare and consumer staples, as people realised these are truly global companies, adds Boersma. But anything cyclical “got clobbered”. Financials were hit particularly hard, yet he says the GEG was underweight this sector in 2007/2008, “so it didn’t underperform too badly”.
Over the past couple of years, valuations in the overall market of European stocks have been “reflecting despair; a feeling that Europeans wouldn’t get their act together”, says Arnold. “But we felt that, practically, there is a lot that still can be done – they have tools they haven't used, such as monetary and fiscal policies.”
“We’ve been through quite a few crises in the past few years,” she adds, “and one thing the authorities do is make sure they have a functioning banking system, as otherwise they won't have a functioning economy.”
Boersma adds: “By buying banks, you take the view there will be further constructive decisions made – which is likely. The cost of fixing things is proving big, but the cost of letting it fall apart would be even bigger.
Indeed, he believes European banks are better value than those in Asia at present, despite share prices falling in the latter region in the past year or so. “Some Asian financials are fairly attractively priced now,” says Boersma, “but they are not competitive in terms of value when held up against the often-distressed valuation levels in Europe.”
The GEG has thus taken advantage of market volatility to buy into European financials, starting around a year ago. And following the drop in bank valuations from March to May – when many fell to 0.3x to 0.4x book value across the region, in cases such as the Italian and French banks – the group added to its positions.
The group has also added a little to positions in “a couple of Europe-domiciled banks” whose share prices have dropped heavily recently due to their European origins and “other issues”, says Boersma. He appears to be referring to HSBC and Standard Chartered, both of which are undergoing investigation by US authorities for alleged money laundering.
As for opportunities in Asia, the GEG is looking closely at adding small positions “at the margins” in industrials, whose valuations have been hit hard in the region, says Boersma. However, the consumer sector in Asia is still viewed very positively, “so we haven't really found new opportunities there".
In terms of commodity stocks, prices are starting to get more interesting, says Boersma, but it’s still not the right time to get in. “You can tell it’s been one long party in Australia [and other commodity-dependent economies], but things have now flattened out a bit.”