HEAD-TO-HEAD: Allianz GI versus Franklin Templeton

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Source: FE Fundinfo. Cumulative returns in US dollars.

Performance

“It is important to understand where the managers of the two funds derive their performance from,” said DeFauw.

He notes that Allianz generates returns from security selection since each sleeve is static at 33% of the portfolio’s assets. Franklin’s portfolio managers, on the other hand, have more asset allocation leeway.

“Both funds should do well during periods where there is a strong appetite for risk, because the convertible and high-yield bond sleeves tend to correlate with equities,” said DeFauw.

However, “given the funds’ focus on US assets, they are likely to underperform in a period when international securities are in vogue; concentration of risk leaves investors, especially those in the Allianz product, vulnerable to high drawdowns,” he said.

The Allianz fund has achieved a three-year cumulative return of 43.01%, according to FE Fundinfo, which is well-above the 22.35% return of the average mixed asset (international) fund available to Hong Kong retail investors.

The performance of the Franklin fund during the same period is less impressive, at only 18.13%, FE Fundinfo data shows.

“From peak to bottom during the early 2020’s sell-off, both funds lost just over 22% but it is what happened in the ensuing recovery that sets them apart,” said DeFauw.

The Allianz fund closed the rollercoaster year a staggering 21.9% higher and ended up in the top 10 decile of the Morningstar US dollar moderate allocation category. Although the Franklin product also made up ground in the rebound, it landed in the bottom quintile of the category for the year, returning a modest 1.3%.

“Much of this performance difference can be explained by the outperformance of growth versus value stocks, as these two multi-billion-dollar funds are on opposite ends of the Morningstar Style Box (large-cap growth versus large-cap value),” said DeFauw.

But, there are perils with that approach. “Sector concentration risks at Allianz bears watching as nearly 45% of the equity portfolio is invested in only two sectors (technology and consumer cyclicals). Unlike Franklin, there are no US treasuries in the Allianz portfolio that serve as ballast,” he said.

Indeed, the Allianz Income and Growth Fund’s impressive returns were generated with much higher volatility and downside risk than the average fund in this category precisely because the managers shun lower-yielding government or investment-grade debt, according to DeFauw.

The fund has been more volatile than Franklin Income over both trailing three-, and five-year periods, although both funds have a higher standard deviation than the average USD moderate allocation Morningstar category peer. The Allianz fund carries a trailing three-year downside capture ratio of 142%, versus 136% for the Franklin product.

“Another risk worth watching is liquidity,” said DeFauw.

Allianz has about $38bn under management in the strategy globally, “and the convertible and high yield sleeves could present challenges in less liquid market conditions,” he warned. “Already, we have seen the number of holdings move higher, which could signal capacity issues.”

DeFauw has similar concerns about the Franklin Income strategy, which comprises more than $70bn globally, and has a significant exposure to high yield bonds.

Discrete calendar year performance

Source: FE Fundinfo. Annual returns in US dollars. *31 Dec 2020 – 12 Aug 2021

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