Balancing Perception, Reality, Equities and Fixed Income

April 17, 2012 Comments off

Never underestimate the power of perception to influence people’s fiscal behavior. Perception is such a significant influence, in fact, that economic tea-leaf readers have developed a myriad of surveys and indicators to monitor individuals’ perceptions of the investing environment because perceptions can—and do—move markets. When sentiment is negative, investors tend to shift out of assets they perceive as “risky” and into assets they perceive as “safe.”  Ed Perks, Senior VP and director of Core/Hybrid Portfolio Management for Franklin Equity Group, , is well aware of the role perception plays in the markets and even took note of it in a previous post to these pages: see “Perception vs. Reality.” Here he picks up the thread with his strategy for determining a strategic mix between equities and fixed income when market perceptions change, and what he sees as the fundamental reality today. His thoughts, in brief:

  • We’ve seen a gradual decline in market volatility levels in the first quarter and, at the same time, an increase in risk-tolerance among investors.
  • Despite market turbulence, corporate profits have remained strong.
  • We think rewarding shareholders, achieving dividend growth, and engaging in share buy-backs should be a big part of the corporate story in 2012.
  • Dividend-paying common stocks offer an interesting opportunity amid the reality of today’s yield-scarce environment. Read more…

Drilling Into Fuel Prices

April 3, 2012 Comments off

Gasoline, deodorant, dishwashing, liquid, eye glasses, crayons….What does this list of seemingly random items have in common? They are all made from refined crude oil.1 So even if you don’t feel pain at the gas pump, you probably rely on more products made with or from crude oil than you’d think. And of course even non-oil based products are generally shipped via fuel-consuming transport vehicles, so you’re bound to feel the pinch in the form of fuel surcharges or price hikes sooner or later.

But Beyond Bulls & Bears has never taken a fatalistic view. If volatility can present buying opportunities, surely there’s a possible silver lining to headline-making oil price heights. And so we turn to Fred Fromm, portfolio manager for Franklin Equity Group specializing in natural resources, and part of the team that analyzes the gold and precious metals market, aka the guy with the inside scoop on all things oil, gold, and even those other less-talked-about commodities.

Fromm in brief: 

  • U.S. demand for gasoline is actually down, but demand outside the U.S. is strong.
  • Geopolitical issues, namely in Iran and Syria, are being factored into oil pricing, but major disruptions may not occur.
  • If China’s growth rate could continue indefinitely, its too-strong growth would likely strain commodity supply.
  • Supply-demand balance looks tight enough to support gold, but demand can fall quickly and should be closely watched.
  • Fromm opts for geographic diversification to avoid the risk of having too many investments in a country with a high degree of political risk.

Read more…

Challenges and Change in Brazil

March 28, 2012 Comments off

When you think of Brazil, what immediately springs to mind?  Carnivale in Rio? Beautiful people on beautiful beaches? Or maybe colorful investment opportunities? You read that right: investment opportunities. Turns out Brazil is just as interesting to investors as it is to tourists.

Brazil’s economy is grappling with some interesting challenges right now, such as shifts in monetary policy to cope with a possible economic slowdown and preparing to host two major events on the international stage— the 2014 FIFA World Cup Brazil™ and the Olympics in 2016. Marco Freire, Franklin Templeton’s CIO, Brazil Fixed Income for the Local Asset Management team based in Sao Paulo, isn’t sharing any locals-only secrets about either event, but he’s happy to share his insights on how Brazil is approaching these challenges, and to clear up some common misconceptions about Brazil’s markets.

Read more…

Diversification at the Core

March 22, 2012 Comments off

Pinning down the origin of the saying, “don’t put all your eggs in one basket” is surprisingly difficult. Some say it’s an ancient Chinese proverb. Some attribute it to American author Mark Twain, or Spanish writer Miguel de Cervantes. It’s a simple saying, one you might expect to find cross-stitched onto a pillow, but don’t let its ubiquity fool you: there’s wisdom in those words.

The late Sir John Templeton was certainly a champion of diversifying one’s “basket” of investments. And so is Tucker Scott, portfolio manager for Templeton Global Equity Group. Diversification is at the core of his investment strategy. A summary of his recent remarks: 

Tucker Scott

  • We try to find stocks that we believe are undervalued, then build a portfolio that’s well-diversified by industry and by country
  • We try to limit position sizes in an attempt to help limit potential stock-specific risk
  • We don’t look to an index as a guide to desired weightings; we rely primarily on internal research
  • The primary area where we’ve been purchasing stocks in Europe is the financial sector
  • The core European countries appear to be in a healthy state; we think the European “project” should continue Read more…

Par for the Investing Course

March 13, 2012 Comments off

There’s a certain Hollywood mystique around the image of the rogue investor with the fortitude to diverge from the crowd on the quest for The Next Great Investment. The un-glamorous truth, of course, is that unearthing hidden opportunities actually takes equal parts elbow grease and know-how. Par Rostom, portfolio manager and vice president of Franklin Equity Group®, is that

Par Rostom

roll-up-the-sleeves kind of guy. He’s not looking to invest in companies just because they are household names with splashy advertising campaigns. The companies he hunts for are the ones he feels are “best in class” in their particular niche, but that you’ve probably never heard of. Surprisingly, he’s finding some of them in the eurozone, a place the crowd is largely avoiding today. Here’s a summary of his approach, in his words:

  • We’re looking for companies that grow sustainably in terms of free cash flow over time.
  • We look at the returns profile for a company historically, and we project that out three to five years.
  • We also make sure that we would view the corporate governance as best in class.
  • A concentrated portfolio allows our analysts to focus…it allows us to take advantage of transient dislocations.

Read more…

Picking Stocks, Stock-by-Stock

March 7, 2012 Comments off

Who doesn’t love a bargain? Scoring something sought-after at a discount can be as thrilling for shoppers on Main Street as deal-hunters on Wall Street. Ferreting out finds takes time, though, and not everyone has the patience—or the resources—to do that legwork.  But Katrina Dudley, portfolio manager with Mutual Series® , is a savvy stock shopper with ample amounts of both. Read on for a taste of her stock-picking approach as inspired by the Mutual Series’ guiding principle:  “buy a dollar’s worth of assets at a discount.”         

  • Macro considerations are important, but they don’t change our stock-by-stock selection process
  • Volatility is here to stay, but it can create opportunity 
  •  We’re looking at the company-level impact of macro influences like eurozone austerity
  • Many European companies are readjusting their cost base, becoming more competitive Read more…

Dipping a Toe Back Into the Market

March 2, 2012 Comments off

Many investors were leery about diving into the market last year, and who can blame them given global debt debacles, job and housing concerns, and a shaky growth outlook. While the market still faces these crosscurrents, the S&P 500’s best January performance in more than a decade 1 and the recent reprieve in a key measure of market volatility are providing  hints that gun-shy investors might be dipping a toe back in.

Easier said than done for some. After the rollercoaster that was 2011, trying to explain why now seems like a good time to venture back in still sounds a little crazy. But for those who are looking for some perspective, you’ve come to the right place. Read on for why Ed Jamieson, president/CIO of Franklin Equity Group®, Peter Langerman, president/CEO of Mutual Series®, Gary Motyl, president/CIO of Templeton Global Equity Group, and Mark Mobius, executive chairman of Templeton Emerging Markets Group, all think it might be time for investors to consider taking the plunge. In brief:

Gary Motyl: “We do expect the global GDP environment to remain challenging—looking for slower global GDP growth but still growth.”

Ed Jamieson: “The market appears more relaxed about world events than one might imagine.”

Peter Langerman: “If you look at one of the commonly referenced measures of volatility, the Chicago Board Options Exchange Market Volatility Index, or the VIX, we are actually at a level which isn’t that far above where we were all the way back in 2007.”

Mark Mobius:  “I don’t believe China’s economy is going to experience a hard landing. I expect the China plane will keep on flying.” Read more…