Templeton Growth Gets New Manager - Again
Changing of the guards a non-event
It was just this past summer when Templeton Growth saw its lead
management duties handed over from Mark Holowesko to Sean Farrington -
just its second manager change in the fund's 46-year history. This
week, just a few short months later, it was announced that yet another
change at the helm was on the horizon. Given the fund's below average
compound return numbers and recent manager changes, some may think
it's time to exit this old fund. In fact, my predecessor in this space
wrote an article recommending to sell Templeton Growth. This week,
we'll look at why this fund remains a keeper.
Details of the change
After just a few months in charge of Canada's largest mutual fund,
Sean Farrington has accepted a role elsewhere within the Franklin
Templeton organization, leaving George Morgan as the main guy behind
this $10 billion Growth Fund starting in January. Farrington will be
working with Mark Holowesko on a hedge fund for the firm's high net
worth clients.
It's a natural reaction for some to look at some of the
underperforming Canadian portfolios for which Mr. Morgan was lead
manager and draw conclusions about his ability to run the Growth
Fund. However, such a judgement would be short sighted without truly
knowing the man or the organization. Morgan has been assisting Don
Reed on Templeton's International Stock fund since 1995 and has been
successful as a lead manager on global portfolios for Franklin
Templeton's institutional clients. More importantly, in this case, is
the firm's investment process.
The organization is larger than the individual
Whenever a mutual fund announces a change in lead managers, there is
one key question that investors must ask: was this fund's past
performance attributable to the management firm or to the individual
manager? My September 29 article about manager turnover outlined the
qualities that investors should look for in a management company so
that they choose investments that are immune to effects of manager
changes.
In that article, I highlighted Franklin Templeton for their highly
disciplined investment process and organizational structure. In a firm
like this, nobody is bigger than the organization. In other words, the
heart of the investment process is their proprietary stock database
and strong team of analysts that do the legwork to compile the
"bargain list" of approved stocks. Once that list is put together,
lead managers need only pick from that approved list to structure
their portfolios. In a conference call this past week, Morgan
confirmed that lead managers simply don't have the discretion to pick
stocks that aren't on Franklin Templeton's "bargain list". The role of
the lead manager should not be minimized but it needs to be placed in
proper perspective, in the context of the larger process.
To demonstrate, let's look at the Templeton Canadian Stock fund for a
moment. Of the past six calendar years, just once (in 1997) did it
beat the TSE 300 or the average in its category (source:
Paltrak98). However, Franklin Templeton has tried everything with that
fund, from relaxing their value criteria to changing lead managers and
nothing seems to work. The fund continues to underperform. Why? I'm
not exactly sure what it is, but I'm pretty sure of what it's
not. It's not the lead manager. On the flip side, Mark Holowesko took
over the Growth Fund from the legendary Sir John Templeton (talk about
a tough act to follow), but the organization made that a smooth
transition.
The myth of underperformance
Investors often look at historical compound returns when comparing
funds. In doing this exercise with this fund one might come to the
conclusion that Templeton Growth has been below average for the last
ten years. In fact, the poor showing over that time is due mainly to
one awful year - 1998 - when the fund turned in a paltry 0.7 per cent
return. In fact, looking back at the last ten calendar years, this
fund has beaten most of its peers and the Morgan Stanley World Index
in eight and six of those years, respectively (source: Paltrak98). In
addition, on a year-to-date basis, the fund is ahead of both its peers
and the index. That's a far cry from ten years of underperformance.
Outlook
Templeton's process remains soundly unchanged, their team of analysts
are numerous and talented, and the portfolio is full of quality names
that are trading at substantially lower valuations than the Morgan
Stanley Capital International (MSCI) World Index, with higher
yields. To illustrate, consider the fact that Templeton Growth has the
following valuation ratios as of November 30, 2000:
a weighted average price-to-book ratio of 1.7 times (vs. 3.5 times
for the MSCI index);
a price-to-earnings ratio of 11.6 times (vs. 26.4 times for the index);
a price-to-cash-flow of just 6.4 times (vs. 14.2 times for the index); and
a dividend yield that is double the index's 1.5 per cent yield
(before fees).
Portfolios with similar characteristics have, over time, tended to
produce higher returns with relatively less risk than an index.
Manager changes often give rise to a reorganization of the portfolio
by the incoming manager, often resulting in big taxable
distributions. However, given the consistency of this firm's approach,
Morgan expects to make no significant changes to the portfolio - good
news for unitholders.
Recommendation
If Franklin Templeton had been having trouble retaining skilled
managers and/or analysts, I'd be worried. However, that's not what has
happened. Instead, Holowesko and Farrington have simply accepted new
opportunities within the firm.
To recap, Templeton Growth is a fund that has outperformed its peers
in 8 of the last 10 calendar years, has an investment style that is
consistent among all of its individual team members, and holds stocks
that are cheap and fundamentally attractive. Finally, Franklin
Templeton has orchestrated very smooth and successful manager changes
in the past.
In my opinion, this is ample evidence that Templeton Growth continues
to be a superb core holding for many portfolios. In other words, it's
a "buy".