D. Marie Deep Dive: $80 billion mutual fund uncovers opportunities in tech stocks, junk bonds
The manager of one of the largest and oldest income mutual funds in the U.S. has discovered a new area for attractive dividends: technology stocks.
Ed Perks, Franklin Templeton’s chief investment officer of equity, is the lead manager of the Franklin Income Fund FKINX, +0.45% The fund has nearly $80 billion in assets, and its main objective is to provide monthly income to its shareholders, using what Perks described in an interview as a “dynamic approach.”
The fund was established in 1948. Its 30-day yield is 3.90%, according to Morningstar, although the monthly distributions mean the yield can fluctuate significantly, according to Perks. The 30-day yield is the standard yield calculation used by bond funds.
Franklin Templeton Investments
Ed Perks, portfolio manager of the Franklin Income Fund.
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The fund had 474 investment positions as of Sept. 30, including 162 bonds, 46 convertible securities and 72 equities. Here’s a broad look at the fund’s allocation as of that date:
Here are the fund’s top five stock holdings as of Aug. 31:
| Company | Ticker | Dividend yield | Total return – 12 months | Price/ consensus 2017 EPS estimate | Price/ consensus 2016 EPS estimate – Oct. 11, 2015 |
| Royal Dutch Shell PLC ADR | RDS.A, +0.40% | 6.24% | -1% | 13.5 | 13.1 |
| Microsoft Corp. | MSFT, +0.88% | 2.73% | 25% | 19.7 | 17.5 |
| Target Corp. | TGT, +0.32% | 3.51% | -11% | 12.8 | 15.3 |
| Coca-Cola Co. | KO, -0.22% | 3.37% | 2% | 20.8 | 20.0 |
| BASF SE ADR | BASFY, +0.76% | 2.76% | 9% | 15.8 | 12.8 |
| Source: FactSet, as of the close on Oct. 11 | |||||
Dividend-stock opportunities in the technology sector
Perks said it was “a lot easier” to find attractively priced dividend stocks in the technology sector than in the four sectors — consumer staples, real estate investment trusts, telecommunications and utilities — that yield-hungry and volatility-averse investors have focused on this year. He said he was cautious in those sectors, which make up only about 10% of the fund’s holdings.
“What stands out to me in this market is that there has been a move in valuations for those companies, not dictated by improving earnings or fundamental growth. It has been driven by investor preference. That creates relative value opportunities in other segments of the market,” Perks said.
“This trend of investors being more and more short-term-oriented, accentuates the opportunity, and should better enable us to achieve good long-term returns.”
Perks cited three tech dividend stocks as good examples: Microsoft Corp. MSFT, +0.88% Cisco Systems Inc. CSCO, +0.03% and Intel Corp. INTC, +1.30%
“In many areas you can find other stocks that are flat or slightly down this year. General Electric Co. GE, +0.42% is a good example,” Perks said. The Franklin Income Fund holds common stock or convertible securities for all four companies.
Here are dividend yields, one-year returns and changes to forward price-to-earnings ratios for the for the common stocks of the companies Perks mentioned:
| Company | Ticker | Dividend yield | Total return – 12 months | Price/ consensus 2017 EPS estimate | Price/ consensus 2016 EPS estimate – Oct. 11, 2015 |
| Microsoft Corp. | MSFT, +0.88% | 2.73% | 25% | 19.7 | 17.5 |
| Cisco Systems Inc. | CSCO, +0.03% | 3.35% | 15% | 12.8 | 12.1 |
| Intel Corp. | INTC, +1.30% | 2.79% | 20% | 13.3 | 13.8 |
| General Electric Co. | GE, +0.42% | 3.18% | 6% | 16.9 | 18.3 |
| Source: FactSet, as of the close on Oct. 11 | |||||
The forward P/E for Microsoft has risen significantly, but this stock has been rather volatile over the past year:
FactSet
High-yield bonds — risks and opportunities
Among the fund’s fixed-income holdings, 90% have below-investment-grade ratings, while about 1% are unrated. Perks said “dislocation” in the high-yield market earlier this year, especially in the energy and commodities sectors, led to heavily discounted buying opportunities. That, combined with “high valuations in the equity market, in low-volatility names,” enabled the fund to shift as much as 10% of the portfolio into credit.
When asked about the risks associated with high-yield paper, Perks estimated the default rate in the bond portfolio to be about 1%. He pointed out that the fund had been buying some stressed high-yield bonds at significant discounts, and that as a creditor, the fund was able to participate in defaulting companies’ bankruptcy negotiations. That means the fund can “come out with a pretty big equity stake,” which might lead to “a successful investment,” he said.
”From our perspective, buying distressed bonds can be a very profitable exercise. You might be buying bonds at 60 cents on the dollar,” Perks said.
Paying for the privilege
The Franklin Income Fund has a competitive yield, but is meant for investors who can make very long-term commitments. Income is the main objective, but the fund also seeks capital appreciation, using what Perks described as a flexible value-oriented approach.
The shares are distributed through brokers and investment advisers. There’s an initial sales charge of 4.25%, unless you invest $100,000, in which case the sales charge drops to 3.50%, with lower charges for larger initial balances.
Yes, that’s a painful upfront sales charge. But if you are a committed long-term investor seeking income, with some growth as well, based on an active, flexible approach, this huge, venerable fund might serve you well.
With a mixed portfolio of stocks, bonds and convertible securities, there’s no perfect benchmark for comparison with the fund’s performance. So here are average total returns for the fund, compared with the Bloomberg Barclays U.S. Aggregate (a fixed-income index) and the S&P 500 (an equity index):
| Total return – 2016 through Oct. 11 | Total return – 12 months | Avg. return – 3 years | Avg. return – 5 years | Avg. return – 10 years | Avg. return – 15 years | |
| Franklin Income Fund Class A | 11.8% | 7.2% | 4.0% | 8.2% | 5.4% | 7.2% |
| Bloomberg Barclays U.S. Aggregate | 5.2% | 4.5% | 3.8% | 3.1% | 4.8% | 4.7% |
| S&P 500 | 7.7% | 8.4% | 10.1% | 14.8% | 7.0% | 6.7% |
| Source: FactSet as of Oct. 11 close | ||||||
The fund’s average returns have beaten the Bloomberg Barclays Aggregate for all periods, but it has lagged behind the S&P 500 SPX, +0.02% for the longer-term periods except for 15 years, where the fund has come out on top. Of course, we’re seven years into a bull market for stocks, so the comparison with the S&P 500 isn’t quite “fair” either.
Published at Sat, 15 Oct 2016 20:04:59 +0000
