The World According to Templeton

The U.S. bull market was not kind to Franklin Resources Inc., with its family of Franklin Templeton funds skewed toward fixed-income and global value stocks. But ever since growth stocks ran out of steam and investors have turned defensive, the San Mateo, California-based mutual fund group has been on a roll. Indeed, Merrill Lynch & Co. estimates that the company’s funds will bring in $18 billion in net new assets this year, and $19 billion in 2003, after a dismal net outflow of nearly $25 billion between 1999 and 2001.

To get a feeling for how Franklin Templeton’s gurus view equity markets now, IA Editorial Director William Glasgall chatted recently in New York with Jeffrey A. Everett, who is chief investment officer for Templeton Global Advisors and manager of the Templeton World and Foreign funds, and Lisa F. Myers, a portfolio manager and analyst for Templeton Global who is responsible for Templeton International Fund. Through June 26, all three funds had handily beaten the S&P 500 in 2002, with Templeton World down 2.36%, Foreign up 1.51%, and International up 1.75%, versus the S&P’s 14.66% decline.

Everett, a Philadelphian, and Myers, a New Yorker, both work out of Templeton Global’s offices in the Bahamas.

How do you explain U.S. investorsh mood right now?

Everett: We know earnings are going down, but the bear market of the boardroom is what is really troubling investors. Investors in America seemed to fall in love with these [star] managers. In overseas markets, we never had this love affair with management.

Between the strong dollar and the recent U.S. bull market, international investing has not been a big winner for American investors. You have argued that there are many bargains to be found abroad. But why are people getting interested now?

Everett: We are seeing a perception among advisors that with the dollar falling, if you get in early, youhll look smart in the eyes of your clients.

Do you hedge your foreign currency exposure, and how will the falling dollar play out?

Myers: We don’t hedge. Seventy percent of the [Morgan Stanley Capital International EAFE] index is in Europe, so I have been shopping very cheaply. Now I get an added bonus because of the dollar.

Everett: Why does the dollar keep getting hit? Frankly, it’s [foreign] investors walking. It took a little while, but they are saying, “Enough is enough. They’re pulling out. It’s an abatement of demand for dollars partly fueled by M&A. And the twin deficits [in the federal budget and current account] are more headwind for the U.S. market. But I don’t view this [dollar decline] as earth-shattering.

Will the falling dollar and rising euro force the European Central Bank to cut interest rastes?