Financial Writing Sample: Investing Styles (Franklin Templeton)

A number of factors go into developing a personal investment strategy. Discuss your goals with your financial advisor, to decide which different tools you will use to achieve your unique investment goals.

Here are a few investment factors to consider.

Time: The amount of time you plan to invest is called your investment horizon. A young adult has decades to invest and so can take advantage of a growth strategy that may see short-term losses while looking forward to longer-term gains. Someone nearing retirement, who has only a few years to realize their goals, may focus on a strategy that concentrates on the more short-term reliability of fixed income investing. We have created a number of calculators to help you figure out how much time it will take you to reach your goals (such as saving for college, retirement, major purchases, etc.).

Risk tolerance: Different investors have different risk tolerance levels that impact investing strategy. Although age could be a factor, in many cases this is driven by an investor’s personality. A young investor might be very conservative with her money, and a retiree might enjoy the thrill of very aggressive investing. While some people are more naturally conservative or aggressive, those inclinations don’t necessarily work to their advantage when it comes to investing. A financial advisor can provide an objective perspective to help find the balance between the investment risk that a stated goal requires and your risk comfort level.

Generally speaking, the risk tolerance of investments (and portfolios) can be categorized as either conservative, moderate or aggressive.

  • Conservative: These investments have the lowest level of risk, but the tradeoff (sometimes called opportunity cost) for that security is a perceived lower chance for growth.
  • Moderate: As the ancient Romans said, “Moderation in all things.” A moderate investment attempts to strike a balance between growth and risk. A moderate portfolio might have aggressive positions in one sector balanced with more conservative ones in another.
  • Aggressive: These investments carry a higher level of risk, but also a perceived higher chance for growth.

Many investment advisors suggest that the longer you have to invest, the higher the level of risk you can include in your portfolio. Consequently, most investors become more financially conservative as they near retirement. To find the right risk mix for you, consult your financial advisor.

Investment goals: Different investments are valued for their investment potential.

Growth investing: Growth investors look for companies that are growing quickly. Growth investing managers look for:

  • Above-average earnings growth. Growth investing managers look to buy companies with strong competitive positions or expanding market opportunities that are often poised for above-average profits or earnings growth. Although profits can be paid out to shareholders, many growth companies reinvest the money back into the company to further strengthen its competitive position or expand into new markets. Check out Franklin’s top growth funds. [link TK]
  • Long-term growth trends. Growth managers also look for companies that are well positioned to capitalize on long-term growth trends that may drive earnings higher. Check out Franklin’s top long term growth funds. [link TK]

Benefits of a growth strategy

  • Return potential. Growth investing tends to be more aggressive than value investing and could potentially offer stronger performance during healthy economic environments. For example, Franklin’s TK growth funds outperformed Franklin’s TK value funds over the last metric TK [link TK].
  • Growth stocks and their counterpart, value stocks, are often in favor in different economic environments and at different points in the business cycle. By combining both growth- and value-oriented investments, you can better diversify your overall portfolio. Franklin offers TK funds that mix value and growth investment styles. [Link TK]

How risky are growth funds? Growth stocks can be volatile and typically are associated with a higher level of risk. Because these stocks often trade at higher valuations, if a company experiences a setback or if earnings don’t meet expectations, the company’s stock price has the potential to take a harder fall. Within all of the Franklin growth funds, both domestic and global, we focus on companies with the potential for long-term sustainable growth. We make sure that every stock we purchase demonstrates an appropriate trade-off between perceived risks and potential return. Franklin seeks to buy strong companies, not just strong stocks. Our objective is to find companies expected to grow faster than the market for multiple years and return the results of that growth to investors.

Value investing: Value investing focuses on companies that have been ignored or overlooked by the markets. Value managers look for:

  • Value investing managers seek companies that are currently trading below their intrinsic value, but whose true worth they believe will eventually be recognized by the rest of the market. These securities typically have low prices, relative to earnings or book value, and often have a higher dividend yield. Franklin examines bargain stocks relative to their industry, earnings growth rates or market using the Franklin bargain list analysis [link TK].
  • Overlooked opportunities. Value managers search for overlooked opportunities. Perhaps an industry is out of favor, or a stock is temporarily depressed due to market overreaction or a missed earnings target. Franklin analyzes company balance sheets to uncover hidden value – assets such as real estate, franchises, patents, distribution networks or other factors that are either undervalued or understated on the books. Franklin also looks at formerly high price-to-earnings growth companies, so called “fallen angles” that may have suffered a one or two quarter earnings blip and dropped sharply in price, but which may still possess excellent long-term potential.

Benefits of a value strategy

  • Lower volatility. Since value stocks sell at a discount, they generally experience less volatility than growth stocks and potentially offer stronger performance during slower-growth environments. In addition, the Franklin U.S. value team employs investing patience, adhering to a buy-and-hold strategy that has resulted in low portfolio turnover rates [link TK].
  • Value stocks and their counterpart, growth stocks, don’t usually move in tandem. By combining both value- and growth-oriented investments, you can better diversify your overall portfolio. In addition to Franklin Templeton’s value funds (Link TK), we also offer TK funds [Link TK] that mix value and growth investing styles.
  • Generally lower risk than growth. All investing entails risk. The investment risk (called the Alpha) of value stocks is frequently lower than growth stocks. That said, a value stock may remain undervalued by the market for a long period of time. For example, the market may fail to recognize the company’s value and bid up the price as expected, or the outlook for a company may deteriorate. Franklin’s U.S. value team tries to minimize risk by being bottom-up investors, focusing on finding companies at bargain prices with solid operating results and strong management teams.

Income Investing: Fixed-income investments such as bonds (U.S. federal, state, municipal, corporate, global bonds, etc.) have the security of a promised return (called face value) when they reach maturity. In some cases your returns are tax-free. It is like buying an IOU note that guarantees regular payments plus interest. Right from the start, you know the full value of the money borrowed plus the interest on the note’s due date.

Fixed-income fund investors believe that the best surprise is no surprise. That’s why Franklin Templeton’s fixed income fund team is constantly evaluating the value of thousands of bonds worldwide. To reach your financial objectives, most investment professionals would agree that it’s important to diversify your portfolio with both stocks for their growth (or capital appreciation) potential, and bonds for their stable income and wealth preservation.

Advantages of Fixed Income Funds

A fixed income mutual fund is a professionally managed pool of money invested primarily in bonds. Fixed income funds offer an affordable and convenient way to access the bond market, as well as other benefits, which may include the following.

  • Monthly Income – Most fixed income funds pay monthly dividends, unlike individual bonds, which usually pay interest semiannually.
  • Professional Management – Fund managers constantly analyze economic and market conditions and individual securities. Fixed income funds charge modest management fees, which are not applicable to individual bond investors.
  • Diversification – A fixed income mutual fund spreads your investment across many bonds, which may help to reduce the risk that one bond’s performance will have a significant negative impact on your investment.
  • Easy Access to Your Money – You may sell some or all of your mutual fund shares at any time and receive their current value (net asset value), which may be more or less than your original cost. In some cases, a sales charge may apply. Selling an individual bond at a fair price and a specific time may be much more difficult.
  • Automatic Reinvestment of Dividends – You may choose to receive a monthly dividend check or reinvest dividends automatically.
  • Flexibility – If your investment objectives change, you can usually exchange into other funds in the same class in a fund family, generally without fees or charges. Some funds offer multiple share classes, subject to different fees and expenses. Certain exceptions and restrictions apply to the exchange program, as stated in the prospectus, and it may be modified or discontinued by the fund(s). Exchanges between funds within a family will normally result in taxable events.
  • A Few Words about Risk – Interest rate movements will affect a fixed income fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a fund adjust to a rise in interest rates, a fund’s share price may decline. These and other risk considerations are discussed in each fund’s prospectus.

Portfolio mix: All of the investments within your portfolio will be gauged somewhere within the conservative to aggressive spectrum. It is important to find a comfortable balance between aggressive high risk investments and more moderate and conservative choices. Tailor your portfolio around your individual investment goals. One size does not fit all. Franklin believes that consulting with a financial advisor will give your portfolio the custom fit you need.