Templeton Growth fund: will Boersma's patience pay off?

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Launched by the firm’s founder, John Templeton, in 1954, the €10 billion Templeton Growth strategy was a pioneer investor in emerging markets. It has a distinctive history, spearheaded by an ability to invest in any stock regardless of geography, and is among the world’s oldest global mutual funds.

When Norman Boersma, who oversees about €77 billion as CIO of the Templeton Global Equity Group, took over management of the fund in 2011, the performance of its various versions was struggling.

In the three years prior to Boersma’s tenure, the Luxembourg-domiciled €4.8 billion Templeton Growth (Euro) fund was managed by Cindy Sweeting and lost 22.3% against a 13.9% drop from its benchmark MSCI World NR USD index.

Far from riding the emerging markets trend, Sweeting had a preference for European stocks and cyclical sector weightings. Big in healthcare, info tech and consumer discretionary, the fund’s exposure to assets rising on global resources headlines was minimal – and unfashionable.

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Waiting it out

Although the fund has ‘growth’ in its title, its investment style is value-based. Boersma stuck to the sector plays on the basis they were cheap in the US-domiciled and Luxembourg-domiciled versions of the fund.

‘The Templeton way of doing things requires patience as it takes longer for the market to recognise what you have seen,’ says Boersma. ‘Sometimes you just have to wait it out.’

Boersma, backed with 20 years’ experience at Franklin Templeton, planned to do just that. ‘I inherited a fund with some pretty big positions and the performance was not where we would have liked it to be. But my remit was to keep on doing what we had been doing.’

Allocating beyond headlines

Over the past few years the fund’s big positions in consumer discretionary, healthcare and info tech, with their inherent cyclical themes, have been out of sync with the market’s increasing volatility. Coupled with a large position towards Europe in late 2010, the fund’s allocation was out of step with the wider macro landscape.

Boersma ran a similar strategy for institutional clients before 2011 when he was head of research at the Templeton Global Equities Group and recalls the stocks that dragged on the performance of the Global Growth fund the most.

‘Healthcare wasn’t working. It’s definitely a value sector and people were worried about the macro issues and the government’s ability to pay for drugs.’

Although not traditionally correlated to economic cycles, the sector was hit over the past few years on fears of patent expiries and regulatory uncertainty.

Yet Boersma stuck to his predecessor’s position and waited long enough to see some pick-up. At the end of the second quarter of 2012, healthcare accounted for four of the 10 strongest contributors to the fund’s return led by US-based firms Amgen and Pfizer.

‘As we go through the patent expiries this year and the next you will see growth from the companies but the market just wasn’t recognising that,’ says Boersma, who remains confident on upside potential for valuations.

Templeton Growth's top holdings

March 2011 (when Boersma took over)

Top 10 holdings Portfolio weight
Microsoft Corp 2.41%
Pfizer Inc 2.36%
Vodafone Group 2.27%
Oracle Corp 2.10%
Accenture 2.02%
Comcast Corp 2.00%
Sanofi-Aventis 1.99%
Amgen 1.95%
Seimens 1.87%
News Corp 1.84%

September 2012

Top 10 holdings Portfolio weight
Pfizer Inc 3.00%
Microsoft Corp 2.52%
Samsung Electronics 2.39%
Sanofi-Aventis 2.37%
Amgen 2.22%
Vodafone Group 2.15%
GlaxoSmithKline 1.99%
Comcast Corp 1.72%
Roche Holding 1.62%
Royal Dutch Shell 1.57%

Growing value

With a heavy weighting towards consumer discretionary stocks, the fund also found itself out of step with the recent risk-off/low-growth environment. ‘Our consumer stocks were mainly comprised of media companies in the US. Both the cable and the content side did badly when investors were getting nervous about the economy.

‘What we did see was that companies were chugging along in a normal fashion and had pricing ability which is rare in today’s economy. They were raising prices and the multiples actually weren’t that bad.’

A decade early on a bubble

The fund’s positioning towards the emerging markets over the past decade has been relatively low. Having benefitted from its exposure to materials and oil stocks and with no TMT holdings as the tech crisis unfolded, the fund sold out of the resources sector in the mid-2000s.

According to Boersma, the premise was that emerging market growth could not endlessly increase and as such commodity prices would have to stabilise.

‘We were buying oil stocks through the tech crisis and nobody cared. The emerging markets then became a huge theme in the mid-2000s, it was a bit of a bubble and we were selling.’

The premise proved right, the timing wrong.

‘By 2005-2006, materials stocks were starting to get pretty pricey running off headlines from China and then we sold. In 2007-2008 they had collapsed and recovered again on the Chinese stimulus and this really hurt us.’

The fund missed buying into short windows when materials stocks looked more attractive on value in 2008 and 2009.

‘We were consequently buying into healthcare, info tech and consumers which were the cheaper areas and are only now working their way through,’ says Boersma.

Undervalued Europe

Despite its tradition for investing in global stocks, the fund currently has nearly half its exposure in European equities. ‘We were clearly early on the euro theme. We’ve been overweight Europe for a while and from having more of a valuation theme in the fund, it’s become more of a Europe one.

‘What you’ve seen in the last year or two is the collapse of the entire European equity market and, with a few exceptions, everything became cheap.’

Boersma says he has been favouring stocks such as Royal Dutch Shell rather than Exxon, and Siemens over GE due to the discount offered on fear of political risks from the monetary union.

‘Our view remains that Europe will muddle through. They have the levers but not the political will – and that can always change when your back is against the wall.’

Bargain banks

Since the start of this year, the Templeton Growth (Euro) fund has returned 28.2%. This is a marginal outperformance of the 27.2% from the MSCI World TR EUR index. ‘I inherited the fund just at the time it was starting to work,’ says Boersma in answer to the question of what he has done to turn things around this year.

Yet one of the biggest changes made and one of the major contributors to performance in the last quarter is an exposure to European banks, he says.

The fund started adding a basket of financials in the summer of 2011 and increased its exposure again this year from an underweight to overweight position.

‘We started buying when we saw banks were in good shape but they were all being priced as if they were about to go bankrupt.’

The emerged markets?

Asked what the next Black Swan event is likely to be, Boersma points to the emerging markets growth story.

‘Everyone just expects emerging markets to motor along just fine and the risk is that China has a hard landing and India won’t reform enough. ‘Over time, high expectations tend to underperform. Our strategy is to tap into the basic nature of investment and how investors overreact to things.

‘It just sometimes takes a little bit longer.’

Citywire verdict

Value investing has been sorely tested in recent years by the highly volatile risk-on, risk-off stock markets.

This, however, can only explain part of the story of the fund that is ‘growth’ by name and ‘value’ by nature. The Templeton Growth fund has mis-timed a number of big market moves and has paid the price.

Over the last decade it was early selling the resources sector and more recently it prematurely bought into Europe.

What Boersma has shown since he came aboard is an ability to react more quickly, for example buying into financials, which has helped performance since the start of this year.

His predecessor, Cindy Sweeting, fell down on big sector weightings that did not recover quickly enough. Sometimes, it appears a consistent approach can perhaps go too far.

Which such diverse investment capabilities this fund might do well to come off the sidelines more often.