ETF opportunities vs. strategic risk

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How Franklin Templeton’s multi-asset strategies offer a disciplined approach in a complex market environment

"THERE ARE actually more ETFs in the Canadian market than there are stocks,” says Michael Greenberg, portfolio manager at Franklin Templeton. This variety, while offering unparalleled opportunities, can also lead to pitfalls for the unwary investor. Greenberg acknowledges that the sheer abundance of options can be both a blessing and a curse. The ease with which investors can now access ETFs has transformed the investment landscape, making it possible to tap into virtually any market theme or sector with a few clicks. However, this accessibility comes with its own set of risks. Eking out gains against a backdrop of continued volatility is no small feat, yet Franklin Templeton is well-positioned to pursue opportunities as they arise. Several headwinds,

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. In Canada, the company’s subsidiary is Franklin Templeton Investments Corp., which operates as Franklin Templeton Canada. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management, and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives, and multi-asset solutions. With more than 1,300 investment professionals and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and approximately US$1.6 trillion (approximately CAN$2.2 trillion) in assets under management as of January 31, 2024.

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Household debt service ratios (share of income): canada vs. us

Date as of 2023 Q4

2000

“I think it is really important in this environment not only to hopefully add value but also to avoid parts of the market that are more challenged within fixed income”

Michael Greenberg, Franklin Templeton

particularly inflation, have shaken investor confidence. Greenberg warns that the very convenience of ETFs can sometimes lead to what he terms “bad behavior” – the tendency to chase last year's trends, buy high, and sell low.

Franklin Templeton’s approach to ETFs is rooted in a balanced strategy that combines the low-cost, broad market exposure of passive ETFs with the active management necessary in today’s volatile market environment. Greenberg explains that Franklin Multi-Asset ETF portfolios are designed to provide robust diversification across asset classes, styles, and sectors while allowing for dynamic adjustments based on market conditions. Franklin Templeton’s approach, is to use passive ETFs to form the core of the portfolios supplemented by active management in areas where potential alpha exists.

The firm’s strategy begins with strong diversification by asset class, style, and sector, carefully targeting a specific risk tolerance for each portfolio. “There are times to be more aggressive in the portfolios and pursue more upside,” Greenberg explains, “and there are times to play defense.” On the equity side, Franklin Templeton bundles together the best passive ETFs within the firm for broad market exposure. These are actively managed to adjust exposures to regions, sectors and factors as warranted. On the fixed income side, active ETFs are used to populate the portfolios. “Given the volatility, we think active management within fixed income is essential,” Greenberg emphasizes. In fixed income, Franklin Templeton has taken a more conservative stance, favoring government bonds and higher-duration assets, providing a buffer against equity risk. This conservative approach is complemented by the expertise of Franklin Templeton’s underlying managers. “I think it is really important in this environment not only to hopefully add value but also to avoid parts of the market that are more challenged within fixed income,” Greenberg notes. “We’re leaning on some of our underlying managers like Western Asset Management, Brandywine Global, and the Franklin Fixed Income team to manage parts of that portfolio.”

Franklin Templeton continues to innovate within its ETF offerings, recently launching a new all-equity portfolio. This portfolio is designed to be very cost-effective and well-diversified, encompassing both domestic and international stocks across developed and emerging markets. The new portfolio is ideal for higher-growth investors willing to take on a bit more risk, or for those who want to use it as the core equity exposure within a broader portfolio. Franklin Templeton Investment Solutions (FTIS), the multi-

Conversely, the team has reduced exposure to Canada and Europe, believing these markets are more sensitive to higher interest rates and economic slowdowns. For instance, the Canadian housing market and consumer debt levels make it particularly vulnerable to rising rates, while European exporters face challenges due to China’s slowdown and geopolitical concerns. Advisors are finding several strategic ways to integrate Franklin Multi-Asset ETF portfolios into their practices. One of the primary methods is through a segmentation strategy, in which advisors focus their time on the top 20 percent of their client book – typically larger clients – and delegate the management of smaller clients to a program like Franklin Templeton’s.

Important Legal Information This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell, or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager, and the comments, opinions, and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. Commissions, trailing commissions, management fees, brokerage fees, and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.

Low-cost passive exposure with dynamic active management

Published September 16, 2024

Making informed decisions. Optimal route. Confidence, move on direction toward achieving desired

Michael Greenberg, Franklin Templeton

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10%

11%

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Source: BIS, Macrobond.

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14.4

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Target Horizon Yield

Source: Bloomberg As of August 26, 2024

Assuming 3.05% starting yield on 10 yr GoC

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-0.69

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+1.14

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Launching a new all-equity portfolio

asset experts, has been fairly overweight in stocks within their portfolios for some time. However, as economic data has begun to slow and valuations have become a bit more stretched, the team has reduced some of the risk within the portfolios. While corporate earnings have remained solid and consumer strength has persisted, recent data suggests that the US economy might be slowing more quickly than anticipated, which could lead to increased volatility. In response, Greenberg notes the team has taken a more cautious approach, increasing cash holdings to provide some dry powder for future opportunities. “We still like the US equity market and have a bit more exposure to emerging markets as well,” Greenberg notes. However, within the US, they have diversified beyond the Magnificent Seven tech names that have driven much of the recent rally, adding more value exposure to help navigate the recent volatility. In emerging markets, the focus has shifted to regions outside of China due to concerns about a slowdown in the Chinese economy. In Asia, FTIS has also added a bit of dedicated exposure to Japan, where currency dynamics are becoming favorable. “Japan’s currency is performing well as other central banks cut rates while Japan is actually increasing them. This could act as a tailwind to our exposure there,” Greenberg explains.

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“They’ll pick the right risk tolerance, put the clients in these portfolios, know that they’re being actively managed at a very good fee, and delegate the investment management to a team like us,” Greenberg explains. Once again, the portfolio distinguishes itself through active management offered at a compelling cost. All Franklin Multi-Asset ETF portfolios are now available as ETF series with a competitively low management fee of just 13 basis points. This approach is particularly effective for certain types of clients, such as younger clients or those with fewer assets under management. Advisors often use Franklin Multi-Asset ETF portfolios as the core part of their clients’ investments, supplementing them with specific mutual funds, ETFs, or individual stocks that they believe have the potential to add value. “They’re not delegating the whole portfolio to us, but they’re using us for 50 to 60 percent of the overall portfolio and then building around it,” says Greenberg. This frees up advisors’ time to focus on other aspects of their practice. In addition to the segmentation strategy, Franklin Templeton portfolios are also being used as sleeves within larger portfolios. Advisors might choose to use the 100 percent equity portfolio as the equity sleeve, or opt for a more conservative portfolio for fixed-income exposure. “The ETF program is a really interesting business solution, depending on how you structure it within your book,” Greenberg notes. It offers a way to save time and allows advisors to concentrate on the more value-added parts of their business.

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