This week’s edition of Barron’s profiles the Franklin Mutual Global Discovery Fund (TEDIX; class A shares). This $25.5 billion (all share classes) load fund has a maximum initial sales charge of 5.75%, expense ratio of 1.28% and portfolio turnover of 24%. According to the article
The fund’s results have been especially good in down markets, such as 2001, though performance tends to trail rival funds during rallies, as occurred in 2012. Over the past five years, Franklin Mutual Global Discovery has returned an average annualized 8.6%, versus 6.5% for the MSCI World Index.
The current two managers took over the fund in December 2009. Therefore, this analysis will only consider the period from January 2010 onwards.
The two benchmarks for the fund are the S&P 500® index and the MSCI World index. One of the available implementations of the former is the iShares Core S&P 500 ETF (IVV). According to Alpholio™’s calculations, since early 2010 the fund returned more than this ETF in only about 6.4% of all rolling 12-month periods; the average underperformance was about 5%. Given the global nature of the fund, this index does not appear to be a truly applicable benchmark.
The second index can be accessed through the iShares MSCI World ETF (URTH). Unfortunately, this ETF became available only in January 2012. Since then, the fund beat that ETF in about 29% of all rolling 12-month periods, with mean and median underperformance of 0.6% and 1.0%, respectively.
Let’s take a look at the Franklin Mutual Global Discovery’s performance using Alpholio™’s methodology, in which the membership of ETFs in the reference portfolio is fixed but their weights can fluctuate. Here is the resulting cumulative RealAlpha™ chart for the fund:
Over the almost five years under current management, the fund generated a modest amount of RealAlpha™ (2.33% and 0.46% for the annualized discounted regular and lag RealAlpha™, respectively). The lag cumulative RealAlpha™ curve was significantly below the regular one. This indicates that new investment ideas did not work out as well as expected. In other words, in many sub-periods investors would have been better off by keeping the previously established reference ETF portfolio rather than following the fund. (To learn more about this aspect of the analysis, please visit our FAQ.)
The annualized standard deviation for the fund in this analysis period was about 11.3%, or close to 0.7% higher than that of the reference ETF portfolio. However, the fund’s volatility was low compared to that of the entire US market, as underscored by the RealBeta™ of only 0.7.
Here is a chart of ETF weights in the reference portfolio of the fund over the same analysis period:
The fund’s equivalent position with the largest average weight of 31.7% was in the iShares 1-3 Year Treasury Bond ETF (SHY). This position represents cash, fixed-income and other low-volatility holdings of the fund. For example, as of the end of September 2014, the fund had about 9.1% of assets in cash and “other net assets.” Interestingly, the most recently published holdings included a Puerto Rico long bond with maturity date of 2035, a risky position an investor would probably not expect in this global equity fund.
The fund’s equivalent stock positions included the Vanguard Value ETF (VTV; average weight of 28.2%), iShares MSCI United Kingdom ETF (EWU; 8.3%), iShares MSCI Germany ETF (EWG; 8.0%), PowerShares Dynamic Market Portfolio (PWC; 7.8%), and SPDR® EURO STOXX 50® ETF (FEZ; 3.5%). The Other component in the above chart collectively represents six additional ETFs with smaller average weights.
Under current management since late 2009, the Franklin Mutual Global Discovery Fund added a modest amount of value on a truly risk adjusted basis. The fund’s hefty front load also diminishes its appeal. Finally, despite its low turnover the fund had substantial distributions in each of the past three years, which made it less attractive for taxable accounts.
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