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?
Everett: No. But the stronger euro prohibits further interest rate rises by the ECB this summer. That’s good for growth. In addition, Europe is in for tax-freer investing. France is going to take the same steps Germany has taken to reduce capital gains taxes. They are going to compete in reforms.
Tell us about some of your favorite stocks.
Everett: One of our largest holdings is BAE Systems [of Britain]. It’s the sixth-largest company in U.S. defense purchases. Its net debt on its balance sheet is zero. Insurance is another area where we’re significantly weighted. It’s a racket if you do it right. Excel [based in Bermuda] just reported a premium income increase of 60%. No other industry out there has reported a 60% pricing increment. In pharmaceuticals, Aventis [a Franco-German company] embodies what we like. It has sold non-core assets, It has Allegra [the popular prescription allergy drug], and it sells at a 25% discount to the average pharmaceutical stock.
You seem to admire some other financials as well, right?
Everett: Swiss Re would be on the top of our list. UBS is, too–a great franchise. We also like Lloyds TSB in the U.K., and HSBC, for its strong balance sheet. It earned a 15% return on equity in 1998, in the trough of the Asian crisis.
Telecom stocks have sure been beaten down. Any you like?
Everett: Cable & Wireless has been a real dog for us. But they have cash and no debt. The telecom sector will rebound, and companies with no debt should do okay.
How about Japan?
Myers: It’s half the [EAFE] index, but we’re not enthusiastic about Japan. It wants to change, but it’s not happening and it’s not going to happen for a long time. They have $250 billion to $300 billion in bad debts. They are talking about restructuring, but I don’t see much happening.
Everett: Some companies are very close to wiping out their book value. Eventually Japan will have to deal with the way it does business. Maybe we are getting closer to that point.