Technology a favourite for Templeton - Shirley Won

Templeton Growth is one of the oldest mutual funds in Canada, launched 55 years ago by the late Sir John Templeton, who died last year. Since its inception, the storied fund has posted an average annual return of 11.9 per cent. Like its peers, however, Templeton Growth suffered during last year's market collapse.

Lisa Myers took over the helm of the fund nearly three years ago. From her perch in Nassau, Bahamas, she is the fifth manager with Franklin Templeton Investments to run the fund. Despite its strong history, the fund wasn't left unscathed by the market turmoil. It posted an compounded annual loss of 8.3 per cent for the three years ended June 30, compared with a loss of 6.2 per cent for the MSCI World Index in Canadian dollars.

We asked Ms. Myers, who was in Toronto yesterday for Franklin Templeton's annual investment outlook forum, about her strategies in the current market environment.

In last year's market collapse, your fund lost 30 per cent. Were you shocked?

The Templeton discipline has been around for 60 years. Buying undervalued stocks and taking advantage of opportunities to buy stocks in those times has historically shown to be a way of generating strong returns for shareholders over time. The discipline has never permitted us to participate in market bubbles or trends - whether it was the Japanese bubble in the 1980s, the technology bubble in the 1990s or the recent commodities bubble and China bubble. Last year, it was very anomalous time. There were very few stocks that went up in that market.

Stock markets have rallied from the March lows. Is it a rally in a bear market or is it the start of another bull market? We don't have an answer to that. There is lot of mixed data out there right now. Corporations were announcing their earnings this week and last week, and they are beating expectations. On the other hand, unemployment is still rising. Industrial production is better, but small companies are still having difficulties to get access to credit ... What we know is that we want to own companies because when the market is rallying you want to participate. You don't want to be out of the market.

Where are you finding the bargains?

We like technology, telecommunications, heath care and media. We like technology in general. There are big companies in the world cutting their costs. They are under pressure from slowing revenues because of the global economic environment. When they get to the point where they can no longer reduce head count and cut expenditures, they start making technology investments, which tend to be productivity enhancing. That helps companies generate earnings growth when the revenue line is not necessarily increasing as fast as it was, or at all. We also think the media space is really undervalued. Media companies, like News Corp., have become big acquirers. By diversifying their asset bases, they have continued to generate a lot of free cash flow.

What about the financial stocks that have been rebounding?

We were very underweight financials going into the crisis, but own some. We think the ones that we hold are better positioned, and didn't hold the toxic assets. One of the largest holdings is DBS Group Holdings Ltd., which is a large Singaporean bank that has a large exposure to the emerging markets. We are still very underweight financials - particularly in the United States. There are certain U.S. and European financials that will continue to see rising default rates, and rising issues for their assets for which they will have to raise more capital. It means dilution for shareholders ... We think [financial stocks] have gotten ahead of themselves.

What advice can you give investors shell-shocked by last year's steep market declines, and those in your fund?

I would tell them that they need to take a long-term view ... The bursting of these bubbles often cause recessions. Markets are quite volatile coming out of those recessions. Generally the things that go down the most will go up the most initially. Then, what happens is that the market reverts to a more value-oriented, normalized market. Investors start paying attention to valuations again, and we get out of this bubble or extreme macro-trading mentality like we have seen over the last month ... That's when the Templeton Growth Fund and the undervalued investments in the fund tend to outperform.

TOP PICKS

Oracle Corp.

The U.S. business software giant will benefit from firms needing its products to generate efficiencies and earnings growth, said Lisa Myers, head of Templeton. "Oracle throws off $8-billion (U.S.) in cash each year, and has $2.5-billion in cash on its balance sheet. It is a consolidator in the sector ... It acquired PeopleSoft Inc., Siebel Systems Inc. and it just recently bought Sun Micro Systems."

Microsoft Inc.

Microsoft, whose software drives more than 90 per cent of the world's personal computers, has more than more than $25-billion in cash on its balance sheet, Ms. Myers said. If its new Bing search engine can increase market share in that space beyond the current 8 per cent, "that's a huge uplift for Microsoft," while China is a potential growing market for its PC software, she adds.

Amgen Inc.

Biotechnology firms have been hit as hard as pharmaceutical companies, whose stocks are under pressure because of drug patent expiration and generic competition, Ms. Myers said. "Amgen doesn't necessarily suffer from [the same] stresses because biotechnology drugs are not as susceptible to patent expiration and to things that chemically-based drugs are subject to because of the way they are formulated."
TOP TEN HOLDINGS

Oracle Corp. 3.19%

Microsoft Corp. 2.97

Singapore Telecom. Ltd. 2.54

UPS Inc., B 2.34

Vodafone Group PLC 2.30

Telefonica SA 2.22

Amgen Inc. 2.20

Comcast Corp., A 2.09

DBS Group Holdings Ltd. 2.08

News Corp., A 2.06