John Beck, Senior Vice President and Co-Lead Portfolio Manager of FLGA, discusses how Canadian investors can benefit from an actively managed global fixed income strategy in today’s uncertain market environment.

Recorded September 17, 2019

Please visit the FLGA ETF page for standardized and most recent month-end performance.


Q&A with John Beck, Portfolio Manager of Franklin Liberty Global Aggregate Bond ETF (FLGA)

What is the goal of Franklin Liberty Global Aggregate Bond ETF (FLGA)?

The principal aim of FLGA is to provide Canadian investors with currency hedged exposure to bonds that are outside of Canada. So, the investor gets the best opportunities in global bond markets that we are identifying outside of Canada. The fund also provides the investor with currency exposure in areas where we think there is opportunity to generate returns, while avoiding exposure to currencies where we see risk from a Canadian investor's perspective. In short, as fund managers we are really attempting to combine the best opportunities from both a diversification and currency perspective.

How does this ETF fit within an investor's portfolio?

This ETF is primarily for investors looking for enhance their portfolio in two ways. First, those investors who are looking to add diversification to their portfolio by getting exposure to bonds outside of Canada. Especially investors who are looking to diversify beyond the core fixed income part of their portfolio that might be concentrated in domestic bonds. Secondly and perhaps more importantly it's for investors who are looking to enhance their yield. Even though global bond yields are lower than they have been over the past 15 years, FLGA has a hedged yield that can exceed local yields of Canadian bonds. With this ETF we believe there is a real potential advantage to having exposure to incremental yields in the context of the larger fixed income allocation of a portfolio.

Why is an active approach important when it comes to global bonds?

When you look at bonds across Europe you have examples like Germany where the whole yield curve on German government bonds is negative. In this type of environment, you will want an investment manager who is able to take a view of the relative values of other opportunities across Europe. Global investors may want to be more heavily invested in Spain, Italy or Ireland instead. By contrast, a country like Japan has also had low yields for a very long time, yet historically the Japanese Yen and Japanese Bond market have tended to do well when their markets contract. This really shows why it is important that you have that active element where a manager is choosing what they see as the best opportunities over the next 3-6 months.

How do you manage currency within the fund?

While we believe currency represents an opportunity to enhance returns within the fund, we don't want currency to dominate the risk profile of the portfolio. We are very disciplined with our currency exposure and will never take less or more than a 10% allocation outside of the base currency. So investors should be confident knowing that 90% of the fund is going to be in Canadian dollars at a minimum. With the other 10% we try to allocate to currencies that we believe are either undervalued or provide higher yields.

What has contributed to the performance of the ETF this past year?

I think our team-based approach has been a big contributor to the strong performance we have seen from FLGA this year. Within our team and other teams across Franklin Templeton we get to hear lots of investment ideas. For example, our Emerging Markets team shared some ideas about currencies in certain emerging market countries that has helped us add extra value to the portfolio. We've also benefitted from the focus on prudent risk-management that comes from our Chief Investment Officer, Sonal Desai, so we think a lot about our relative risk positions within the fund. Lastly our Active Quant colleagues helps us identify opportunities that may not be obvious from a macro-economic perspective, are actually appealing when you look at the correlation and diversification within the broader scope of the fund. Combining these different perspectives and area of expertise is what makes FLGA stand out.

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.

John Beck'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.