The following is a transcript of a video presentation.
The Complexity of Today’s Fixed Income Market. The fixed income markets are not just huge in size, but they are also increasingly complex. Not only do we have investments in the United States – in the domestic market – but it really is an increasingly global market. We have issuers from local governments, corporations, the federal government in the United States, and when we look outside the domestic market, we have many of these same types of bonds which exist on a global basis as well.
The bond markets really are increasingly complex, with the innovation we’ve seen over the past really, 10 to 20 years. We've had high-yield bonds, emerging market debt instruments, more recently, bank loans. We’ve seen TIPS or Treasury Inflation Protected Securities and then, most recently, CDS or credit default swaps. And if anything, the pace of innovation and new product type and structures is really accelerating.
Understanding the Global Market. Well with the increasing sophistication and innovation in the fixed income markets, we think it really has brought on almost a requirement to have both depth and breadth when assembling a fixed income platform.
When I speak about depth, I’m really referring to the teams of specialists that we put together we think we really need to have in this marketplace, to dig into and analyze the individual types of securities in the market. When I speak of breadth, I’m really referring to the growing opportunity set – the number of different types of products and sectors out there – and we think you have to have breadth within your platform to really fully take advantage of the different opportunity set. We’re fortunate here at Franklin Templeton to have both the depth and breadth, the size and the resources needed to compete in this increasingly sophisticated marketplace. Like many businesses, the financial services business is no different in the sense of it's become increasingly a global business, really over the past 10, 20 years.
We are fortunate as a fixed income platform, as an organization, because of the history of our firm. We've always grown as a global firm with very much of a global approach to things. In the fixed income platform, we certainly have professionals in the United States, but we complemented this with investment professionals located in the U.K., in China, in Korea and in India. Ultimately, we think there's no substitute for fundamental financial analysis.
In the case of global markets, it’s really analyzing countries and currencies. And we think our global infrastructure really gives us a competitive advantage in this marketplace. I would simply add, an example of this is our Templeton Global Bond Fund, which has been in existence for more than 20 years now.
Benefits of Fixed Income Investing. Income is certainly a key component with bonds, but it’s really much more involved than that. Certainly when we look at equity investments there’s no question that over the long term, equities provide a higher potential return than bonds, which is great until equities have a difficult year. And certainly we don’t have to go that far back to see examples of this – 2000 through 2002 when equities did in fact suffer negative returns – bonds really provided an awfully good cushion, as is typical in markets like that, bonds provided a solid positive return to offset in good measure, some of those negative equity returns.
Most importantly though, bonds are really about providing diversification and risk reduction for the overall portfolio. And even for the more aggressive investor, ones with longer time horizons, generally speaking, to optimize one's overall portfolio, an allocation to bonds is generally prudent and makes the most sense for that investor.
Risk Management. Fixed income and bond investing, as all types of investment have risk and it’s important to have a very established approach to minimizing risk. We do this in a couple of different levels. First level would simply be, at the individual security level, we have teams of specialists that understand the complexities of each type of bond, and are able to analyze these risks on a day-to-day basis.
Secondly, we have a quantitative team that spans the overall fixed income platform, looking across the different types of securities. This team is charged with analyzing and looking at all the downside risks as well as the potential volatility of different types of securities as well as portfolios and funds as a whole.
Selecting a Bond Fund. For those looking for broad fixed income exposure – a diversified approach to their bond investing – we do offer a couple of solutions that really fit that bill. Solutions that offer diversification, that invest in the markets both domestically and globally, invest from corporates to government bonds, different maturities, different parts of the credit spectrum.
The two primary products in this area are really our, Total Return Fund, which is a fairly high quality product, and then complementing that is our Strategic Income Fund, which is a similar product, similar approach, but really geared for those that have a bit higher risk tolerance, a bit longer term horizon, and can in fact look for the potential for a bit higher returns.
Now both of these products really offer diversification for one, but also have the full opportunity set across our fixed income platform, and we think open up the various opportunity set that takes advantage of the full resources and access that we have as an overall fixed income platform. For the average investor, we feel that investing in bonds through a mutual fund vehicle does provide some significant advantages versus trying to buy individual bonds. First and foremost is simply diversification. A bond fund is almost always going to be much more diversified than a pool of individual bonds. Secondly, transaction costs. As a large institutional buyer, we are able to buy and sell individual bonds at much more effective transaction costs and prices than the individual investor.
And lastly, I would say access to certain types of bonds and bond markets – whether it's bank loans or emerging market debt instruments – really very difficult markets to access as an individual investor, but once again as an institutional investor, we can really access those different markets through a mutual fund vehicle.
Is Now a Good Time? I would say it’s always a good time to invest in the bond market. Bonds are not really meant to attempt to time the market. Bonds are really meant for diversification and risk reduction of one's overall portfolio. And whether that's an investor with a very low risk tolerance and a short time horizon or an investor with a higher risk tolerance and a longer term horizon, an allocation to bonds is really very effective in optimizing one’s overall portfolio.
The following does not reflect the audio commentary portion of the video presentation.
Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. To obtain a prospectus, which contains this and other information, talk to your financial advisor, call 1-800/DIAL BEN (1-800/342-5236) or visit franklintempleton.com. Please carefully read the prospectus before investing.
The information provided in this piece is not a complete analysis of every material fact regarding any market, region, industry, security or fund. Opinions expressed are subject to change without notice. An assessment of a particular security or investment may change without notice and is not intended as an investment recommendation.
A Word about Risk. Bond prices, and thus the share price of a bond fund, generally move in the opposite direction of interest rates. As the prices of bonds in a fund adjust to interest rates, the fund's share price may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability, and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. These and other risks are detailed in a fund prospectus.
Additional risks of investing in Franklin Total Return Fund. Interest rate movements and mortgage prepayments will affect the fund's share price and yield. The risks associated with higher-yielding, lower-rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Please carefully read the fund’s prospectus before you invest or send money.
Additional risk of investing in Franklin Strategic Income Fund. High yields reflect the higher credit risks associated with certain lower-rated securities held in the portfolio. Floating-rate loans and high-yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy. Please carefully read the fund's prospectus before you invest or send money.
Front-end, and in some cases back-end sales loads, management fees, Rule 12b-1 fees and other expenses are associated with Franklin Templeton mutual fund investments. These fees and expenses reduce investment returns. The funds are offered through prospectuses, which contain detailed information about a fund's sales charges, expenses and risks. |
