Like the seed waiting to emerge beneath an icy winter blanket, there are equity growth opportunities sprouting that perhaps aren’t obvious on the surface. When the global economic landscape seems rocky and unfertile, you might think opportunities in growth-oriented stocks would be stunted. Serena Perin Vinton, co-manager for Franklin Growth Fund, knows where to dig for those growth opportunities though, and sometimes it’s in unusual places. One area she points to is U.S. manufacturing, which she believes could be set to stage a comeback.
When the economic climate is uncertain, many investors become risk-averse, and preservation takes priority over growth. But Vinton believes seasons of uncertainty are when equity opportunities can hold the most promise for a future growth spurt.
“If you look at equities and the fundamentals of some of these businesses, in our view many are actually doing quite well in this sort of tumultuous period of time. Management teams are doing a nice job of managing their businesses and being good stewards of capital, and we’re finding a number of interesting opportunities in companies that are meeting our criteria for growth, quality and valuation. We spend a lot of time focusing on that quality aspect of the business and the sustainable growth aspects of the business. And valuation is very much a component of our growth investing strategy. This environment enables us to use short-term volatility to our advantage in investing in what we believe are high- quality, sustainable growth businesses. The fact that people are very nervous about the markets is giving us opportunities to invest in what we see as great businesses for the long term. And given our long-term time horizon, such uncertainty enables us to really focus on the core business and as long as it’s not broken, then often that gives us an opportunity to increase our position in a stock.”
One potential growth area Vinton sees quietly budding is U.S. manufacturing. Short-term manufacturing sector trends in the U.S. may be weak, but the long term looks more promising to Vinton, particularly if a trend toward “reshoring” gains momentum. Increasing wages in China, combined with higher transportation costs from overseas plants, are causing many U.S. companies to bring production back to North American shores.
“We’re starting to see this concept of a potential manufacturing renaissance. A lot of U.S. companies are bringing manufacturing back to the U.S or have pledged to do so; for General Electric (GE) and Caterpillar,1 for example, shipping costs across the ocean can be quite expensive for products of heavy weights, and the U.S. has a real competitive advantage with low-cost natural gas pulled from shale discoveries. With good availability of labor, low-cost natural gas and a cheap U.S. dollar, it’s allowing U.S. companies to bring back manufacturing with a competitive cost advantage. So we’re excited about some of the long-term opportunities.”
When given a long-term growing season, Vinton notes equities may not look as “risky” as investors with shorter-term horizons might perceive them to be, while the interest rate risk of many of today’s fixed income investments has the potential to take an unanticipated bite.
“This fear of taking on risk has pushed a lot of people into fixed income. People forget that even though you earn interest in fixed income, you can lose your capital.2 Should interest rates start to move back up, your total return can turn negative. A lot of companies in the equity space are being good stewards of capital; their balance sheets appear to be in good shape, and they’re reinvesting in the business for future growth. And in many cases they’re still paying a healthy dividend yield. So I think now is actually a great time to be looking at some of these high-quality, long-term, sustainable growth businesses.”
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What are the Risks?
All investments involve risks, including the possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investing in dividend-paying stocks involves risks. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notices. Historically, the Franklin Growth Fund has focused on larger companies but the fund may also invest in small, relatively new and/or unseasoned companies, which involves additional risks, as the price of these securities can be volatile, particularly over the short term. In addition, the fund may invest up to 40% of its net assets in stocks of foreign companies, which involve special risks, including currency fluctuations and economic as well as political uncertainty. The fund many focus on a particular sectors of the market from time to time, which can carry greater risks of adverse development in such sectors. These and other risks are discussed in the Franklin Growth Fund’s prospectus.
1. Source: As of June 30, 2012, General Electric Co. represented 0.62% of total net assets in Franklin Growth Fund; Caterpillar Inc. represented 0.45% of total net assets. Holdings are subject to change.
2. Fixed Income or bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.