FRANKLIN QUOTENTIAL PORTFOLIOS

Transcription

1 FRANKLIN QUOTENTIAL PORTFOLIOS Quarterly Review DECEMBER 31, 2017

2 QUARTERLY ACTIVE MANAGEMENT REVIEW The information in this report is based on the Franklin Quotential Balanced Growth Portfolio unless stated otherwise. Global equity markets advanced in U.S.-dollar terms during the fourth quarter of Investors mainly focused on continued indications of positive economic growth from several regions and expectations surrounding tax reform in the United States. The International Monetary Fund in October upgraded its forecast for global growth in 2017 and However, it cautioned that recovery from the global financial crisis remains incomplete, and that latent risks could return as central banks pivot away from extensive stimulus. In the United States, a major tax bill was signed into law in December that featured a significant reduction in the corporate tax rate. The U.S. Federal Reserve (Fed) raised short-term interest rates during the same month, the latest in a series of well-flagged moves. The European Central Bank (ECB) raised its forecast for eurozone gross domestic product (GDP) growth in 2017 and through 2020, though it expects growth to moderate after In early November, the Bank of England hiked its benchmark interest rate for the first time in 10 years. Japan s preliminary third-quarter GDP grew at a stronger-than-expected pace on the previous quarter and on an annualised basis. U.S. stocks gained 6.84%, and Canadian stocks returned 4.45%. Emerging-market equities climbed 7.70%. The global fixed income market gained 0.71%. U.S. high-yield bonds returned 0.72%, while Canadian bonds returned 2.02%. Stephen R. Lingard, CFA Senior Vice President Franklin Templeton Multi-Asset Solutions Portfolio Manager Franklin Quotential Portfolios Michael Greenberg, CFA, CAIA Vice President Franklin Templeton Multi-Asset Solutions Portfolio Manager Franklin Quotential Portfolios PORTFOLIO PERFORMANCE RESULTS Returns as of (CAD$) Inception Date 3 Mths 6 Mths 1 Yr 3 Yrs* 5 Yrs* 10 Yrs* Since Inception* Franklin Quotential Fixed Income Portfolio, Series F** 7-Nov % -0.11% 1.41% 0.35% Franklin Quotential Diversified Income Portfolio, Series FT 17-Feb % 1.71% 4.51% 3.78% 4.93% 5.23% 5.82% Franklin Quotential Balanced Income Portfolio, Series F 19-Aug % 2.75% 5.99% 4.98% 6.82% 5.08% 5.98% Franklin Quotential Balanced Growth Portfolio, Series F 19-Aug % 3.91% 7.39% 5.71% 8.31% 5.06% 6.35% Franklin Quotential Growth Portfolio, Series F 19-Aug % 4.90% 8.73% 6.54% 9.72% 4.86% 6.01% Franklin Quotential Diversified Equity Portfolio, Series F 9-Jun % 5.84% 10.92% 7.75% 12.11% 4.93% 6.98% *Annualized Returns. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. **Series F is available to investors participating in programs that do not require Franklin Templeton to incur distribution costs in the form of trailing commissions to dealers. As a consequence, the management fee on Series F is lower than on Series A. 2

3 CURRENT THEMES AND ASSET MIX DECISIONS Although a fixed income underweight and an equity overweight benefitted relative returns, the portfolio s overall allocations and fund selection weighed on performance. Detractive fund selection in equity more than offset favourable selection in fixed income. Relative results were also hampered by modest cash exposure and currency positions. Regionally, an overweight in Europe ex United Kingdom and selection in Canada and emerging markets weakened equity relative performance. In contrast, fund selection in Canadian bonds and Japanese stocks helped relative returns. On a regional basis, we continue to favour Japanese equities and maintain an overweight to these stocks. Japanese economic indicators continue to remain strong, and the fall 2017 electoral victory by Prime Minister Shinzo Abe suggests to us this momentum will continue. Profits continue to be a key driver for Japanese equities, and remained at both cyclical and structural highs. Central bank policy in Japan has been supportive, and Japanese equities should benefit from strong leverage to the global economic acceleration taking place, in our opinion. Relative valuations at December-end appeared attractive to us compared to developed-market peers. We increased exposure to Canadian bonds in the fourth quarter, and lowered our global fixed income exposure. We also added an equity fund focused on the financials sector. We increased our allocations to Japanese stocks and Canadian large-cap equities, while exiting an exchange-traded fund focused on large U.S. stocks and lowering our allocation to European equities. With regards to European stocks, concerns over potentially plateauing profit margins, a strong euro s impact on corporate profitability and the nascent tightening of credit conditions led us to a more cautious view. 3

4 PORTFOLIO DIVERSIFICATION UPDATE To achieve the investment objective of the Portfolio, the Franklin Quotential investment team has the following multi-level diversification in place to help alleviate concentration risks and to provide maximum exposure to present and evolving opportunities. The weighting below represents the multi-level diversification within the Portfolio by asset class, economic sector and type of fixed income category. ASSET CLASS Canadian Fixed Income 26.34% U.S. Equity 18.53% Canadian Equity 22.09% International Fixed Income 8.75% European Equity 10.5% Emerging Markets Equity 5.52% Japanese Equity 6.15% Pacific Ex Japan Equity Alternatives Cash & Other Assets 2.11% EQUITY SECTOR As a % of Total Equity Financials 24.17% Industrials 13.88% Consumer Discretionary 12.55% Information Technology 12.11% Energy 10.49% Consumer Staples 7.23% Health Care 6.53% Materials 6.00% Telecommunication Services 3.17% Utilities 1.94% Real Estate 1.92% Unassigned 0.00% FIXED INCOME CATEGORY As a % of Total Fixed Income Canadian Provincial 34.54% Corporate Investment Grade 30.04% Corporate High Yield 7.38% Sovereign Emerging 7.02% Canadian Federal 6.93% Sovereign Developed 4.63% Other Fixed Income 9.46% Values may not total 100% due to rounding. Other Assets: Non-security holdings including cash, cash equivalents and net receivables. High Yield: Includes ratings BB, B, CCC, CC, C, D. Source: FactSet, as of. Important data provider notices and terms available at 4

5 HOLDINGS UNDERLYING INVESTMENT POOL ALLOCATIONS Dec-17 Sept-17 Jun-17 Mar-17 Canadian Equity Funds (%) Franklin Bissett Canadian Equity Fund Franklin Activequant Canadian Fund Franklin Templeton Canadian Large Cap Fund Franklin Bissett Small Cap Fund ishares S&P/TSX 60 Index ETF U.S. Equity Funds (%) Franklin U.S. Rising Dividends Fund Franklin U.S. Core Equity Fund Franklin U.S. Opportunities Fund ishares Core S&P 500 ETF N/A 1.54 N/A N/A ishares Russell 1000 Value ETF N/A N/A Franklin LibertyQT U.S. Equity Index ETF N/A N/A Financial Select Sector SPDR Fund 1.78 N/A N/A N/A European Equity Funds Ex-UK (%) Franklin Mutual European Fund BMO MSCI Europe High Quality Hedged to CAD Index ETF SPDR EURO STOXX 50 ETF FTIF Franklin European Small-Mid Cap Growth Fund* N/A N/A N/A 1.18 UK Equity Funds (%) N/A N/A N/A N/A ishares MSCI United Kingdom ETF N/A N/A N/A N/A Emerging Markets Equity Funds (%) Templeton Asian Growth Fund FTIF Templeton Emerging Markets Smaller Companies Fund* ishares Core MSCI Emerging Markets ETF Templeton Frontier Markets Fund Japanese Equity Funds (%) FTIF Franklin Japan Fund* ishares MSCI Japan ETF Canadian Fixed Income Funds (%) Franklin Bissett Core Plus Bond Fund Franklin Bissett Canadian Government Bond Fund Franklin Bissett Canadian Short Term Bond Fund Global Fixed Income Funds Franklin Strategic Income Fund Franklin Us Low Duration Fund Templeton Global Bond Fund Alternatives SPDR Gold Trust Cash & Other Assets (%) Values may not total 100% due to rounding. Source: FactSet as of. Important data provider notices and terms available at *FTIF (SICAV) Funds are not available for direct purchase in Canada. Société d Investissement à Capital Variable (SICAV) is an open-end investment company governed by the laws of Luxembourg. 5

6 UNDERLYING INVESTMENT HIGHLIGHTS** Franklin ActiveQuant Canadian Fund: CGI Group CGI has grown to become the world s fifth-largest provider of information technology (IT) services, including the management of IT and business functions (outsourcing), systems integration and consulting, and the sale of software solutions. Over the past few years, the company has grown by offering CGI-built, IP-based business solutions, which inherently carry higher margins and robust cash flows, as well as targeting small firm or niche player acquisitions and transformational deals. From a quantitative perspective, CGI looks attractive to us for its reasonable valuation, strong levels of profitability, positive earnings momentum, rising estimates and low levels of price and earnings volatility. Franklin U.S. Core Equity Fund: MasterCard, Inc. MasterCard is a technology company that provides infrastructure connecting consumers, financial institutions and merchants for the implementation of credit and debit transactions. MasterCard represents one member of a virtual duopoly within the payment processing landscape, and we believe the company is poised to benefit from multiple secular trends, including the migration of transactions from cash to credit cards due to the growth of ecommerce and the growth of a global middle class and related consumer spending. These trends provide MasterCard a potential source of embedded revenue growth even before factoring in possible advancements within their product lineup. FTIF Franklin Japan Fund: Denso Corporation Denso Corporation is the largest car parts supplier in Japan, known for its leading-edge technology and competitive advantage in powertrain control systems, environmental control systems and sensor technologies used in safety systems. We expect solid business growth from progress on its electronic vehicle (EV) development venture with Toyota, along with products related to fuel saving and advanced driver assistance systems (ADAS) for other car manufacturers. Over the longer term, we believe the company will benefit from continuous sales growth and increasing profitability driven by the rapid advancement of electric vehicles and autonomous cars. Franklin Mutual European Fund: Volkswagen Group Volkswagen, a global automaker, announced better-than-expected quarterly results in October. Investors were particularly encouraged by the underlying improvement in free cash flow and liquidity. Volkswagen also raised its 2018 guidance moderately, including its operating margin, as it is in the midst of a positive new product cycle. Shares of Volkswagen received further support from the company s strategy update in November; management expressed confidence in hitting its long-term financial targets and stated its intention to raise its dividend payout ratio. We believe Volkswagen has been taking the steps needed to move past its emissions-related transgressions. *FTIF (SICAV) Funds are not available for direct purchase in Canada. Société d Investissement à Capital Variable (SICAV) is an open-end investment company governed by the laws of Luxembourg. **Opinions and beliefs expressed are those of the fund managers as of and are subject to change without notice. 6

7 INVESTMENT OUTLOOK Major central banks remain in the spotlight. In recent months, the Fed commenced balance sheet normalisation, Jerome Powell was pending Senate approval to succeed the current Fed chair, and the ECB announced it will taper its quantitative easing programme in Our analysis suggests the liquidity environment should remain accommodative, with aggregate central bank balance sheets likely expanding during 2018, although there is a possibility for volatility to pick up as monetary policy normalisation continues throughout Global synchronised recovery is supported by rising corporate earnings and profit margins, and we hold a favourable view of global equity. Global growth has continued to expand at a modest pace. Leading economic indicators remained upbeat notably purchasing managers indexes and confidence measures. We believe global growth is now best characterized as synchronised, which has rarely occurred outside of the original recovery from the global financial crisis. Furthermore, corporate indicators were also positive, with rising earnings-per-share growth and strong profit margins. Recent U.S. tax reforms could also accelerate U.S. business spending and contribute to productivity, further supporting growth momentum. Stephen R. Lingard, CFA Senior Vice President Franklin Templeton Multi-Asset Solutions Portfolio Manager Franklin Quotential Portfolios Michael Greenberg, CFA, CAIA Vice President Franklin Templeton Multi-Asset Solutions Portfolio Manager Franklin Quotential Portfolios Franklin Templeton Multi-Asset Solutions (FT Multi-Asset Solutions) is a world-wide team dedicated to global portfolio-based solutions and draws on the expertise of a number of Franklin Templeton affiliates. In Canada, the advisor to FT Multi-Asset Solutions mandates is Fiduciary Trust Company of Canada. Opinions and beliefs expressed are those of the Portfolio s managers and Franklin Templeton Multi-Asset Solutions. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. 7

8 Franklin Quotential Portfolios For more than six decades, individuals and institutions around the world have viewed Franklin Templeton Investments as a trusted partner in asset management. We leverage multiple independent investment teams to deliver truly specialized expertise across a wide range of styles and asset classes from traditional to alternative strategies and multi-asset solutions. Our investment professionals are on the ground across the globe, spotting investment ideas and potential risks firsthand. Collectively, they allow us to offer clients a unique investment perspective shaped by local insight, global context and a long-term investment horizon. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. The indicated rates of return are historical annual compounded total returns including changes in unit value and reinvestment of all 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. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Indexes are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The information presented herein is considered reliable at the present time; however, we do not represent that it is accurate or complete, or that it should be relied upon as such. The information presented herein is not a recommendation or solicitation to buy or sell securities. Franklin Quotential is a registered trademark owned by Franklin Templeton Investments Corp. Hamel Wealth Management Group Manulife Securities Incorporated 5575 North Service Road, Suite 101 Burlington, Ontario, L7L 6M1 Tel: (905) Fax: (905) Toll Free: (888) Franklin Templeton Investments Corp. All rights reserved. 658 HGIR 1217