Amid volatile economic and political conditions, with more drama hitting the U.S. markets in a matter of weeks than is seen in most years, Franklin Income Investors is sticking to its measured strategy even as it makes portfolio changes to reflect a new macro environment. Managers like Franklin Income Investors, which can express their views by moving between dividend-paying stocks and bonds in a diversified fund, can signal where the market is headed.
“We’ve pulled back on some areas that we think look more fully valued. Corporate credit would be a good example: That was an area that we have been quite overweight in,” Ed Perks, president and CIO of Franklin Income, told Institutional Investor. “And we’ve added more in areas of the government market and agency mortgage-backed securities where the yield carry is very attractive for income [and] we saw coupons trade through six percent in the last couple of months.”
Perks added that the default positioning of the fund is to have half of the fund in a mix of fixed income assets and the other half in income-producing equity assets such as dividend stocks, convertibles, or other equity-linked structures. “This year has shown that broad diversification across asset classes is crucial,” he said.
On the equity side the firm looks for broad diversification across sectors amid macro uncertainty, drilling down into what company management teams are telling investors and their expectations for where things are headed and whether it could lead to an actual and durable increase in volatility in the financial markets.
Franklin Templeton itself is under pressure with its stock underperforming the market as a result of withdrawals from subsidiary Western Asset Management, after co-chief investment officer Ken Leech was placed on a leave of absence following investigations from the SEC into his trading actions. Perks said that because outflows have come specifically from WAMCO the rest of the business remains in good shape. “It is an unfortunate situation and a challenging one for the firm to navigate, but Jenny (Johnson, CEO) and our CFO, Matt Nichols, have a definitive plan to get us through this,” he said.
Perks believes the questions hanging over economic policy and geopolitics will have longer term consequences. “It’s a challenging time when you have this much macro uncertainty, markets typically don’t like that. We would not be surprised to see that lead to more actual, and a durable increase, in volatility in the financial markets.” (The CBOE volatility index, the VIX, is hovering at a relatively low level so far this year, sitting currently at 19. When the index rises above 30 it indicates heightened fear in the stock markets.)
But, amid geopolitical strife, he added that clients remain concerned by what they see as unprecedented market conditions and are asking him questions about how to navigate them. “People are worried... it is not just fixed income there is a little more angst around back-to-back 25 plus percent years,” he said, adding that things looked very different a year ago. The CPI rate, for example, rose rose 2.8 per cent compared to February 2024, more than expected, prompting the Federal Reserve to continue its pause on interest rate cuts in news it called “sobering.”
Investors also are concerned about the dominance of the large tech stocks, and whether market vulnerability could lead to a substantial pullback unlike anything seen in recent years.
But of course, volatility can be a good thing, if managed properly. “We want to be able to take advantage of volatility setting in,” said Perks. But “It seems like when you do get that spike in volatility its short lived, we saw that in August of last year.”
