U.S. Election Worries and The Case for Active Management

As we draw closer to November 3 and the U.S. Presidential Election, the performance of equity markets has become a key campaign issue.

Driven largely by the momentum of the FAANG stocks, the S&P 500 recovered the losses of the March drawdown to reach a record high in early October. These gains have been a key talking point for Donald Trump, who assures the U.S. electorate that he is best placed to lead the world’s largest economy in its recovery from the COVID-19 pandemic.

Democratic Party presidential candidate Joe Biden counters that the current administration has hindered a more widespread economic recovery by simply not treating the underlying cause of the recession seriously.

Currently, the polls indicate that Biden’s message is resonating more with voters, but the reliability of polls has been called into question ever since Trump’s victory in the 2016 election.

While the race for the Oval Office receives much of the attention globally, the Congressional elections (also on November 3) to elect the House of Representatives and the Senate will also have a huge bearing on how the U.S. fares in 2021 and beyond.

The prospect of a ‘Blue Wave’ where the Democrats capture the White House and both Houses of Congress has some market observers concerned about tax increases in the corporate space. Others point to an escalation of the trade dispute with China under a re-elected President Trump.

That aside, this election takes on added significance in that it is taking place during a global pandemic— COVID-19 and the development of a vaccine will ultimately dictate the wellbeing of the U.S. and the global economy for the foreseeable future. The same can be said for equity markets, where a sharp upward curve in the indices since March glosses over the fact that only a small number of listed firms are experiencing growth right now.

It is amid this uncertainty, and with the possibility of much more geopolitical and economic turbulence to come, that I would like to make the case for active management.

When constructing a well-balanced portfolio, it is important to identify the overlooked companies that sometimes get lost in the shuffle amid the mega cap names that dominate the main indices (Amazon and Apple in the S&P 500 and Shopify in the S&P/TSX, for example). Using a bottom-up approach is the best way to find the kind of high-quality growth companies with attractive valuations that can really generate alpha in a portfolio. Equally important is to select firms with uncorrelated revenue streams, thereby lowering your overall risk profile.

This approach is what active management is all about and is central to the investment philosophy of the new Franklin Global Growth Active ETF (FGGE). This ETF uses the same strategy as the highly successful Franklin Global Growth Fund, which was launched in 2008 and has first quartile returns* and a 5-star Morningstar rating** over all time periods.

The strategy has a high-conviction 37 name portfolio benchmarked to the MSCI World Index, but none of the top 10 holdings of Franklin Global Growth are in the top 10 holdings of the MSCI World, and three of its holdings are not even in the benchmark. 

	Portfolio Weight	MSCI World Index Weight	Relative Weight
Humana Inc.	3.44	0.12	3.32
salesforce.com,inc.	3.43	0.5	2.93
Floor& Decor Holdings, Inc. Class A	3.33	0	3.33
SVBFinancial Group	3.29	0.03	3.26
BrightHorizons Family Solutions, Inc.	3.16	0	3.16
AptivPLC	3.11	0.05	3.05
KoninklijkeDSM N.V.	3.08	0.06	3.02
DSVPanalpina A/S	2.99	0.08	2.91
HDFCBank Limited Sponsored ADR	2.97	0	2.97
CSLLimited	2.94	0.21	2.74

Source: Factset, as of September 30, 2020

1. As a satellite holding alongside a North American core exposure, allowing an investor to gain access to names that are somewhat unrepresented and provide a low correlation to the benchmark indices, as show in the table above.
2. Pairing FGGE as a high-conviction active position with either the MSCI EAFE or MSCI World benchmark as a passive solution. This is a great way to increase performance and Sharpe Ratio in an overall portfolio.

In terms of performance, the Franklin Global Growth strategy, represented by Franklin Global Growth Fund, has been impressive against global benchmarks.

Franklin Global Growth Fund Performance vs. Global Indices (%)

Name	1 Mo (Mo-End) CAD	3 Mo (Mo-End) CAD	6 Mo (Mo-End) CAD	YTD (Mo-End) CAD	YTD (Mo-End) CAD	Annlzd 3 Yr (Mo-End) CAD	Annlzd 5 Yr (Mo-End) CAD
Franklin Global Growth F	0.3	8.06	34.84	22.15	34.1	17.72	15.26
S&P 500 TR CAD	-1.38	6.83	23.23	8.75	16.17	14.77	14.06
S&P/TSX Composite TR	-2.06	4.73	22.51	-3.09	-0.03	4.26	7.16
MSCI EAFE GR CAD	-0.1	2.86	13.26	-3.92	1.83	3.35	5.7
MSCI EM GR CAD	0.9	7.59	21.67	2.07	11.89	5.07	9.29
MSCI World GR CAD	-0.98	5.96	21.21	5.2	11.97	10.73	11.01

Source: Factset, as of September 30, 2020

If you would like to learn more about this solution and how to implement it into your portfolio, please reach out to me or one of your local Franklin Templeton wholesalers.