Having a diversified portfolio is always important, especially in times of volatility like recent weeks.
If you’re looking for broad diversification in a single exchange-traded fund, you might consider actively managed Franklin Income Focus ETF (INCM) .
The fund, started in June 2023, has $271 million in equity and fixed-income assets. It’s part of Franklin Templeton, which had $1.6 trillion in assets under management as of June 30.
The Franklin fund produced a return of 9.52% for the 12 months ended Aug. 7, according to Morningstar. That compares with 10% for the Morningstar US Moderately Conservative Target Allocation index.
We recently spoke to Edward Perks, a manager of the fund. Its benchmark asset weighting is 50-50 between stocks and bonds. But it can veer in either direction, giving it the flexibility to take advantage of investment opportunities and to manage risks, he said.
Franklin Templeton
The fund is now overweight fixed-income, thanks to high interest rates. And it’s underweight equities, thanks to the stock market’s recent concentrated returns, he said.
Here are Perks’s comments, including stock picks.
Franklin fund manager highlights investment strategy and stock picks
TheStreet.com: What’s your investment philosophy?
Perks: We invest in a broad range of equity and fixed-income securities. We seek attractive income and opportunities for capital appreciation.
The fixed-income includes Treasurys, agency mortgage bonds, investment-grade corporate bonds, high-yield bonds and floating-rate loans.
The fund also holds common stocks, preferred stocks, convertible bonds and structured equity derivatives. Over a market cycle our benchmark is 50-50 between equity and fixed-income.
We have tremendous flexibility for asset allocation, which allows us to take advantage of the most attractive income opportunities and manage the biggest risks.
The recent past shows the benefits of a flexible and multiasset portfolio, not just in terms of income but also in resiliency during volatile markets. The strategy allows us to be contrarian. We can reallocate to areas of greater value when certain assets go up.
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TheStreet.com: How do you choose the weightings between your asset classes?
Perks: It’s partly top-down. We evaluate opportunities in different fixed-income markets and within equities. We look at the forward path for income and assess macro risk, determining how that affects total return.
We marry that to a bottom-up, fundamental approach. We’re looking at each company, sometimes in multiple parts of the capital structure. Typically 30% to 40% of our investments are in multiple parts of the capital structure.
TheStreet.com: What are your current weightings?
Perks: As of July 31, the equity weighting was 39.4%, fixed-income was 58%, and the rest was cash. For equity, that divided into 21.3% in common stocks, 17.7% in structured equity-linked notes and 0.4% in preferred stock.
For fixed-income, it was 23.4% in investment-grade corporate bonds, 22.2% in high-yield bonds and bank loans, 11% in Treasurys and 1.3% in agency mortgage bonds.
We’re overweight fixed-income because yields moved up in 2023. So fixed-income offered higher yield and low prices.
We’re underweight equities because the stock-market rally was narrow. Beyond the Magnificent Seven [Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla], the market isn’t doing much. Overall valuations aren’t that attractive, but there are some opportunities.
The 50-50 weighting between equity and fixed-income is our center post. When we move away from that, it’s for an income opportunity or a risk-management benefit.
Related: Veteran fund manager who predicted stocks' drop updates outlook
TheStreet.com: What’s your approach to stock-picking?
Perks: We look for best-of-breed companies with valuation premiums to their peers. We try to find opportunities to get them at more attractive valuation levels. We don’t have sector tilts. Diversification is good in a portfolio.
TheStreet.com: Can you discuss three of your favorite stock picks?
Perks:
1. Chevron (CVX) , It’s the best of breed for a major oil company. It had an earnings miss, which isn’t uncommon in this industry. But it’s a good opportunity for a long-term investment.
It has a reasonable valuation of 10 times next year’s earnings. It has a good dividend yield [4.5%]. It has some of the most attractive return opportunities on projects to drive the stock over the next three to five years.
Many of the projects have attractive economics, with oil prices as low as $60 a barrel. [U.S. crude traded at $76 on Aug. 8.] We see a continuation of attractive earnings and cash flow.
2. JP Morgan Chase (JPM) . It’s the best of breed for a commercial, consumer, institutional bank. You’re getting the asset management almost for free.
Its leadership in investment banking and trading are important drivers. The bank’s net interest income may go down as the [Federal Reserve] cuts rates. But other parts of the franchise can more than make up for that.
When the market is volatile, it’s a good time to add a position in this kind of company.
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3. Texas Instruments (TXN) , the semiconductor maker. The valuation has gotten more attractive [in recent weeks]. It has a dominant position in analog chips, which are the least sexy but go into everything we use.
It’s not a company hitting on all cylinders. The personal electronics and communications equipment sectors are strong. But there has been weakness in the industrial and auto sectors.
They’re more economically sensitive and have been hurt by the high-interest-rate environment. But as rates normalize, those businesses can look much better in 2025. That’s the driver.
TheStreet.com: Any other thoughts?
Perks: Investors should be prepared for more volatility in the second half of the year. Diversification across asset classes helps in that environment. Be dynamic and nimble, playing offense when markets are under pressure. We’re well suited to that approach.
The author of this story owns shares of JP Morgan Chase.
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