It’s a buying opportunity: Franklin Templeton’s Myers

With a soaring dollar and sagging markets, Canadians have been burned by global investing but this should not deter their resolve, says Lisa Myers, portfolio manager of Franklin Templeton’s flagship Templeton Growth Fund. Myers believes market conditions are right for patient Canadian investors to use the high dollar to purchase bargains.

Value investing is not every client’s forte, because there is the appearance of risk in investing in companies that are usually in a beaten-up sector. During the types of volatility that markets have experienced the last few months, it becomes an even more difficult proposition. Clients want stability.

Global value investing doesn’t mean clients have to put their money in what looks like sinking ships. On a conference call to Canadian advisors earlier this week, Myers outlined that there are great opportunities to be had investing in a lot of well-known, well-capitalized large cap multinationals.

“I think we have to use periods of uncertainty as buying opportunities, because in these periods of uncertainty what tends to happen is the high quality stocks get punished right alongside the lower quality stocks,” she says.

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Myers says the problem is that most investors and mutual funds have a six-to-12 month time horizon on their holdings, which makes it difficult to realize a turnaround in undervalued stocks. With a five-year time horizon for holding quality companies, investors have a great likelihood of seeing a significant turnaround and capitalizing on the volatility.

“While most investors and the average holding period in the market are six to 12 months, most investors are prepared to invest unless they can see a catalyst during within that time period. If you move that catalyst within a period of five years you’re really changing that dynamic.”

Using a longer term view, Myers notes that many stocks, particularly non-financial U.S. large caps, are trading at decade-low price-to-earning ratios. Many are still experiencing strong earnings growth, particularly those that have expanded to non-U.S. markets.

Myers also outlined to advisors that non-financial U.S. stocks are also their highest proportion of cash reserves since the 1960s. This is why, during a period of credit-tightening, corporate giants like Microsoft can still field multibillion-dollar takeover offers for competitors like Yahoo. Microsoft also derives almost 40% of its revenues now from outside the U.S.

These favourable conditions have existed for a while. The problem for Canadian investors is that the Canadian dollar has sucked away any growth experienced by these companies over the last five years. Myers concedes that the five-year annualized returns for an investor who invested in the MCSI World Index, would have experienced returns of only 6.97%, whereas, if they invested U.S. dollars, that return would be 17.51%. Money kept in the Canadian market, which is obviously almost entirely denominated in Canadian dollars, would have yielded a 17.81% return.

According to Myers, since 2000, the Templeton Growth Fund U.S. dollar denominated performance has been 67.25%, whereas in Canadian dollars, that performance has been 14.95%.

“The Canadian dollar has been a heck of a headwind to have to face,” she says.

On the converse, those stats also outline the tremendous buying opportunity U.S. investors were able to realize five years ago when their currency was coming off of historical highs.

Myers believes Canadian investors have a similar opportunity now to set the framework for a similar five-year run if they diversify into global large caps, particularly ones that are diversifying their revenue from different geographic markets. This gives investors the relative safety of the large capitalization of a company while giving the exposure to growth of emerging markets.

For example, she is keen on Singapore Telecom, which is well capitalized large cap stock that also has significant exposure to the growing Indian telecom sector through its large stake in Bharti Telecom.

“Singapore Telecom has a 30-35% stake of Bharti Telecom. It allows us to buy a piece of Bharti Telecom for less than half the valuation if we were going to buy Bharti Telecom directly from India,” she says. “Not to mention Singapore Telecom has a lower price-earning ratio, lower price-to-book ratio, offers a dividend yield, and is a company in a developed market with an experienced management team.”

Of course, the big question is whether the Canadian market will recede. Myers believe it will, since almost 80% of it its weighting is in energy, materials and financials.

If today’s current commodity cycle runs it course, Canadian investors could be in trouble, and the purchasing power of their dollar to diversify geographically would be greatly diminished. Diversifying now globally would provide a hedge and it can be done at a cheaper cost.

As for financials, which have been beaten up, that’s one sector Myers is hesitant to invest in right now despite their historically low stock prices.

“Financials are being penalized but we are just not sure that their earning capacity or the asset value capacity is that much greater than what the current share price is reflecting,” she says. “To the extent they may have further writedowns, they are not going to generate the same level of fees from securitization; they are all de-levering — growth will be nominal over the next few years. We are not sure there is a lot of value there over the next few years.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(04/07/08)

Mark Noble