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

Ahmed Farooq, CIMA®, CFP

Ahmed Farooq, CIMA®, CFP
Vice President - ETF Business Development at Franklin Templeton Canada

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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

Two uses this solution could have in an investment portfolio are: 

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
1 Yr
(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.

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What Are the Risks?

Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.