China saw a massive sell-off early this week on the back of poor manufacturing data, which was the weakest in the last six years and added to investors’ worries about an economic slowdown.
The government’s latest move to devalue its yuan currency has worsened market volatility and spread negative sentiment globally.
At the same time, bond yields are falling as interest rates are expected to remain low for years.
Against this backdrop, Fund Selector Asia compares the Franklin Income Fund and the MFS Meridian Global Total Return Fund.
The Franklin fund received the platinum award at the inaugural FSA Awards in the Singapore universe of mixed asset funds, while the MFS fund received the gold award in the Hong Kong universe of mixed asset funds.
Both the Franklin and MFS funds adopt a balanced fund approach to build a portfolio. They aim to maximise income and offer capital appreciation by investing in large-cap companies.
The Franklin fund generally allocates 55% of its assets to equities and the remainder 45% to fixed income securities, whereas the Meridian fund invests about 60% in equities and the rest in debt securities.
Even though the performance of both funds has been very similar from 2005-2014, there are significant differences in how each fund operates within its investment mandate, said Leonardo Drago, chief investment officer at Al Wealth Partners.
Drago provides a comparative analysis of the two funds.
Investment strategy review
The Franklin fund has 49.6% of its assets in equities and 41.7% in bonds (as of July 31). For the MFS fund, equity and bond exposure was 59% and 35.3%, respectively.
Looking at the portfolio construction, the MFS fund’s bond allocation looks more conservative than the Franklin fund, said Drago.
“The MFS fund’s bond allocation is more conservative, with top allocations made to the US and Japanese government longer-dated bonds, whereas the Franklin fund has 95% of its bond allocation in non-investment grade corporate high yield bonds.
“This allocation means that the Franklin fund would be more exposed to a widening spread of high yield bonds, which typically happens during periods of market stress,” Drago added.
Bond yields and bond price have an inverse relationship, so higher yield impacts the portfolio valuation adversely. When yield spreads widen, the portfolio is more susceptible to value erosion.
Average duration, which measures how susceptible a bond portfolio is to an interest rate rise, is lower for the Franklin fund (4.61 years) compared to 6.4 years of the Meridian fund.
Funds with higher average duration take more of a hit on returns when bond yields rise, while funds with low duration can better withstand the downside risk.
Given the Franklin fund’s higher exposure to below investment grade papers, the average credit quality of the fund is B+, lower than the MFS fund’s A+.
Like bonds, equity portfolio orientation also differs among the two funds.
“The Franklin fund is more US focused (83% weighting). The MFS fund has a more global allocation as more than half of its portfolio is invested outside the US and the fund is also underweight the US (48.2%).”
The Franklin fund can invest up to 25% of its assets in non-US securities, according to its fact sheet.
In terms of sectors, the Franklin product has held significant exposure to the energy sector, Drago pointed out.
Apart from the energy sector, the Franklin fund is also overweight on utilities and materials companies, while the fund is underweight healthcare, consumer discretionary, financial and technology companies.
The MFS fund, on the other hand, is overweight consumer staples, healthcare and utilities and communications companies. It is underweight financial sector.
A snapshot of portfolio allocation