HEAD-TO-HEAD: Allianz GI versus Franklin Templeton

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Investment approach

There are some major differences with the two funds’ investment mandates, according to DeFauw.

“Allianz has a slightly riskier allocation, but also a more rigid one,” he said. Its mandate is to divide the fund evenly across US convertible securities, high-yield bonds, and stocks with a covered-call overlay.

“This makeup stands in sharp contrast with its typical US dollar moderate-allocation category peers, which prefers safer government-and investment-grade bond exposure to offset some of the equity risk,” said DeFauw.

The Allianz team seeks companies with positive catalysts and then determines which part of the capital structure offers the most compelling opportunity, but in practice, issuer selection is also constrained by what is available, because the management team does not invest in investment grade credit.

The Franklin Income strategy pursues a more flexible approach, and equity exposure has ranged between 25% and 60% since lead manager Ed Perks took the helm in 2002.

“Management relies on bottom-up security selection to drive the asset allocation with little regard to sector weightings,” said DeFauw.

It follows follow a valuation conscious approach, investing in a mix of dividend-paying stocks (52% at end-June 2021), bonds (27%), and convertibles and equity-linked securities (17.8%). Unlike Allianz, Franklin invests in investment-grade securities.

“Within equities, the Franklin fund’s management gravitates towards large-cap dividend-payers, which translates into overweight positions in utilities and energy,” said DeFauw.

These two sectors account for 20.2% and 9.5% of its total stock holdings, compared with 1.9% and 4.4% for Allianz, respectively, at end-June 2021.

In contrast, the Allianz team “favours higher-growth sectors, such as technology” and allocates around 27% of the equity portfolio in these sectors, versus 5.2% for Franklin at end-June 2021. Allianz’s top holdings include Alphabet, Microsoft, Facebook, and Apple – which is very different to the major holdings of the Franklin fund, which includes Verizon Communications, Exxon Mobil, Merck & Co, and Procter & Gamble in the Franklin portfolio.

Meanwhile, “high-yield bonds are important for both funds to generate income, but their dominance alongside equities comes with significant credit risks,” said DeFauw.

Whereas Allianz allocates about a third to high-yield bonds, Franklin has adopted a more flexible approach over time, he noted.

Currently, bonds with a credit rating of BB or lower account for around 65% of the total fixed-income exposure at Franklin, down from 90% some five years ago. Allianz’ fixed-income sleeve has less than 5% in bonds with a credit rating of A or higher, versus around 21% for the Franklin fixed income portfolio.

Fund characteristics

Asset allocation:

Source: Fund factsheets, 30 Jun 2021

Sector allocation:

Source: Fund factsheets, 30 Jun 2021

Top 10 holdings:

Source: Fund factsheets, 30 Jun 2021

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