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Finding value in complicated times

Geopolitical turmoil and other international market movers play a part in this team's value-selection process, explains Franklin Templeton's Peter Wlimshurst.


Glenn Freeman: In this edition of "How We Invest Your Money" I'm speaking with Peter Wilmshurst on global equities, including how he and his team selects good-value businesses within an increasingly expensive global market.

Thank you very much for your time today, Peter.

Peter Wilmshurst: Thanks, Glenn.

Freeman: Now, we are talking today global equities. Now, you are a global equity manager. Can you just talk us through the fund that you manage and the strategy that it employs? It's called a growth fund but it's value-based. Can you just talk us through what that means and how you actually put together that portfolio?

Wilmshurst: Sure. So, the naming goes back to our original U.S. mutual fund which was called the Templeton Growth Fund in the U.S. founded in 1954. So, quite a few years ago now. And the Templeton Global Growth Fund when we brought it to Australia in '87, we kept the same name. And back then, there wasn't the clear distinction there is nowadays between who is a value manager and who is a growth manager. So, we always very much have run it with a value style. And that means basically that every stock we buy into the portfolio goes in because one of our analysts based somewhere in the world deems it to be significantly undervalued.

Freeman: That must be quite difficult at the moment given that we do hear a lot about how expensive equities are. How do you find those companies that are good value?

Wilmshurst: Yes. Search far and wide. I mean, ultimately, we've got the – pretty much all our portfolios can invest all across the world, developed markets, emerging markets, across pretty much any industry as well. And I think when most people make observations about what the share market has done, how expensive it is, they go to the U.S. The U.S. is the biggest market. It's the biggest country in pretty much all our portfolios at this point in time. But there's a lot of the rest of the world out there. And when you go back and if you take from time period of June 2009 to basically now, so nine years, the U.S. market is up 200%, the rest of the world is up more like 50% in U.S. dollar terms. So, it's much harder to find value in the U.S. which is why we are dramatically underweight pretty much most managers when you come to the U.S. Now, we still do find a number of names in the U.S. and we don't think we are stretching our valuation criteria for the ones we do find, but we end up with 35%-odd in the U.S. compared to the benchmarks which are more like 55%.

Freeman: And getting down to sort of the nuts and bolts of how you manage the fund, how big is your team, where they are located and what's the process that you follow there?

Wilmshurst: So, the overall Templeton Global Equity Group within Franklin Templeton Investments manage just under US$100 billion. So, that's across mostly global equity portfolios but certainly for a lot of our American clients they want to buy international. So, the two biggest pools within that US$100 billion are either global or global excluding the U.S.

The teams in nine offices around the world, three in North America, three in Europe and then three in Asia into Australia and the team is about 38 large, 38 people large. All of us do both work as PMs as well as analysts. So, most of our analysts take a global sector and follow whether it would be the auto industry or the insurers or software or integrated energy companies around the world and those analysts are basically free to find the best idea they can within their sector. The entire team will get involved in the debate when an analyst brings a new bargain forward. We are free to take potshots, disagree, argue to really try to stress test that value case and it's only once it's got through that vetting by the rest of the team, that any PM from our CIO and down can buy that stock.

Freeman: Sure. So, you mentioned there at the sector level. So, is that rather than being bottom-up in terms of assessing the individual companies that you look at the sector level first and then it goes to the individual company?

Wilmshurst: No, we would describe it as bottom-up. I guess, it's more the way we are organized. So, each of the analysts has their universe, a global sector. I mean, I think, we've been arranged that way for a long time. So, we've seen over the years, I think, it's probably got more popular to look at the world that way as more of the – I mean, just take autos. I mean, Toyota competes with European auto companies, competes with U.S. auto companies. The trends that you see develop in one market flow into another market over time. But for us, it makes you a – it gives you a better chance of understanding the industry, thinking about how it's going to evolve over time. I mean, think again about autos. Autonomous driving, electric vehicles, ride sharing, three key themes. They will develop at different speeds in different markets. But you've really got to have a view on how those industry themes are going to develop. But for us, it comes back to whatever you view about the industry is, can you find individual companies that you think are undervalued.

Now, the companies aren't going to be immune to what's going on in the economy. They are not going to be immune to what's going on in the industry. But put it into your forecast for the earnings, the balance sheet, the cash flow of the company and then compare it to the share price that Mr. Market is willing to sell you those shares at today.

Freeman: I suppose following on from that, how does the geopolitical side of things factor into your decision-making in deciding which markets you are focused on. So, for instance, in Europe, we've got Brexit which is still churning away. In Asia, we've got the big trade war concerns between the U.S. and China. How do you think about those things and does that factor in?

Wilmshurst: It has to ultimately. No company has got a big revenue source from Mars or Mercury or anything like that. So, it's all going to be a function of things going on – the famous value investors in the past, I guess, have talked about wanting to buy when there's blood in the streets. So, certainly, occasionally, you are going to get opportunities when the market just overreacts. We certainly saw that, you mentioned Brexit, but during the European sovereign crisis before Mario Draghi came out and said he would do whatever it takes to hold the Eurozone together. You could buy banks in Europe in – not the great banks, not the Irish or Portuguese banks, but banks in France at one-third of book value. So, you do have to think about those things. You have to get comfortable with them. But ultimately, sometimes those will present the most attractive opportunities.



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