Beyond Bulls & Bears

Perception vs. Reality

Ed Perks
Ed Perks

For many investors, the new year doesn’t appear all that new. Home prices remain anemic, job growth feels inadequate and the market is about as turbulent as ever. But there’s a flip side to every coin and there’s often potential opportunity hidden in what looks like just plain old trouble.

Ed Perks, lead manager of the flagship Franklin Income Fund, senior VP and director of Core/Hybrid Portfolio Management for the Franklin Equity Group and regular contributor to these pages, ruminates on what he sees as a continuing theme of disconnection between perception and reality and how it will shape the investment landscape in the year ahead:

“Turning the calendar certainly leads us to think about the year coming up, but in reality, when I think about Franklin Income Fund and the positioning, the simple turning of the calendar really doesn’t influence what we’re doing in markets.

I do think one theme that will stand out for 2012 will be perception versus reality. Both in the U.S. and globally, the perception certainly has been that there are tremendous obstacles to economic activity: growth going forward, really related to the substantial debt deleveraging that we see taking place not just in the consumer and government level, but also in the corporate sector over the last several years.  I think there are certain components that I have to agree with when I think about that argument or that perception in the economy. But I think we also have to acknowledge that we have made progress.”

A retrospective considering the events of 2011 reads almost like a movie plot, with one unbelievable scene after another.  While at times the markets seemed to be fighting the tide, Perks points out that as astonishing as it may seem, the U.S. did actually make some forward progress:

“Looking at all the challenges we faced in 2011: the devastating effects of the earthquake in Japan and the tsunami; the ripple effects through the global supply chain in a number of different industries and sectors; some monetary tightening in some of the emerging market economies that really had been a tremendous growth driver for the global economy coming out of the recession; the tremendous dysfunction and political polarization in Washington, leading to not only a near-default of the U.S. Treasury prior to the debt ceiling extension, ultimately leading to a downgrade of the U.S. Treasury by Standard & Poor’s; and then the complete failure of the joint supercommittee of Congress. You know, probably one of the more frustrating aspects of the markets and what impacted the economy in 2011, given how self-inflicted some of those events were and really should’ve been more in our control.

In light of all that, I think it’s difficult to sit here in the U.S. and point fingers over at European leaders for not addressing their issues. We do, I think, have this tendency (at least at this point) to attempt to continue to kick the can down the road on some of these bigger problems. I think we also have to maybe acknowledge that can tend to get larger each time you kick it down the road and, ultimately, may start to really hurt the foot that’s kicking it.

That’s some of the perception, I think, that exists in the markets relative to the economy. I think the reality is that the U.S. has made progress in certain areas, and we have to start focusing on where there’s actually been some resilience or even more recent improvement in the economy. We have to resist the temptation to focus on all of the data that inundates us with such high frequency as we look at the economy and, rather, try to step back and look at some of the trends and, ultimately, evaluate where we think the economy as a whole is going.”

Want more from Ed Perks?

Read more on Beyond Bulls & Bears: Making Sense of Market Sentiment (9/29/11)

Do you know the case for equities in the decade ahead?  Click to see our “2020 Vision” on FranklinTempleton.com.

Are you a financial advisor?  Log in to listen to Ed’s 1/5/12 audio cast playback on franklintempleton.com.



What Are the Risks?

The fund’s share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. The fund’s portfolio includes a substantial portion of higher yielding, lower-rated corporate bonds because of the relatively higher yields they offer. Floating-rate loans are lower-rated, higher-yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. These securities carry a greater degree of credit risk relative to investment grade securities. While stocks have historically outperformed other asset classes over the long term, they tend to fluctuate more dramatically over the shorter term. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. These and other risk considerations are discussed in the fund’s prospectus.

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