A legendary portfolio of global stocks

Occasionally, when a mutual fund becomes so famous for its characteristics, many think of it as just a cliché. When it comes to extra long term success in international investing, Templeton Growth Fund may be just that — a cliché. But we still think it’s a good fund.

Templeton Growth Fund (Fund code: TML700 (FE), TML732 (DSC), TML648 (LSC)) has become something of a worldwide legend in the mutual fund business. Started in 1954, this fund exemplifies the investment philosophy of its founder, Sir John Templeton.

Mr. Templeton got his start in the stock investing business in the 1930s. One of the investment decisions he is most famous for is the purchase of every stock on the New York Stock Exchange that traded for less than $1 on the outbreak of the Second World War in 1939. He ended up buying the stock of just over 100 companies, 34 of which went bankrupt. His initial investment totaled about $10,400. This investment grew to more than $40,000 by 1943, when he then sold the stocks.

Thus began Mr. Templeton’s career of value investing, or looking for investments that were cheap. But, of course, cheap is attractive only if there’s value. So Mr. Templeton set about building a research method, looking for bargain stocks trading well below his estimate of value. If he was right, others would eventually recognize that value and bid the price of the stock up.

When to buy and sell

One of the cornerstones of Sir John’s investment credo is number 13 of his 28 Investment Principles: “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Even the Templeton organization may not always be able to gauge exactly when these extremes occur. But in buying bargain stocks in times of pessimism, the Templeton funds often miss out on rapidly rising market segments such as the tech bubble of 2000.

But with pessimism high when it buys, the value investing approach of this organization seldom sees its funds fall dramatically.

So, how do Templeton Growth Fund’s portfolio managers view the markets now? James Harper and Norman Boersma think stocks are vulnerable to near-term volatility. Nonetheless, they like the long-term potential for global stocks.

They find quality stocks the “most expensive relative to value on record.” And growth stocks are the most expensive they’ve been since the tech bubble. The managers expect these trends to eventually normalize, supporting the rise of the value stocks in which they specialize.

That investment philosophy, together with the research capability that followed, has led Templeton Growth Fund to a 61-year compound annual growth rate of 11.9 per cent.

Relative performance over the past 10 years, however, has been lackluster. The fund has returned an annualized 5.1 per cent over this time, lagging the 5.5-per-cent average return of all funds in the global equity funds category.

Relative performance in recent years has improved. Over the past one-, three- and five-year periods, the fund has consistently outperformed the category average. Over five years, for example, its annualized return is 12.5 per cent, versus the category’s average 10.5 per cent.

Bargain hunting and value investing

Templeton Growth Fund says it will invest in any stock anywhere in the world. The fund’s analysts take a stock by stock approach, bargain hunting for value wherever they can find it. There is no bias to any country, region or industry.

The fund’s current top country weightings are as follows: the U.S., 38.7 per cent; the U.K., 13.2 per cent; France, 7.8 per cent; Japan, 6.1 per cent; Switzerland, 4.6 per cent; South Korea, 4.5 per cent; the Netherlands, 3.4 per cent; Germany, 3.3 per cent; and Italy, 2.1 per cent.

When it comes to global investing, we think almost any investor would do well to consider this fund as a core holding. Buy.

 

Money Reporter, MPL Communications Inc.
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