HEAD-TO-HEAD: Franklin versus MFS

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Investment approach

This Franklin fund has been managed in a valuation-sensitive style for two decades, according to Caquineau.

“The three fund managers are looking for heavily discounted stocks in the European large- and mid-cap landscape,” he said.

They pay attention to free cash flow generation and favour corporate management that they believe uses cash to benefit shareholders. Valuation analysis is completed by looking at private market transactions to better understand what informed buyers are willing to pay.

“They have a multiyear investment horizon, which has helped keep turnover well below peers’ levels,” said Caquineau.

“The portfolio is constructed from the bottom-up, with no constraints versus the MSCI Europe Index in terms of stock, sector, or country weightings,” he added. The portfolio typically holds around 50 names with an active share of around 80%.

The managers can use cash as a safety net during depressed markets or when they don’t find enough reasonably priced stocks.

“While the team typically moves at a slow pace, market dislocations can accelerate the turnover in the portfolio. For example, in 2020, the team made more drastic changes than usual given the fallout of the Covid-19 virus.

In comparison, MFS does not have such a strong investment style and its portfolio holds a mix of value and growth stocks, according to Caquineau.

Individual stocks are included following a majority vote at weekly meeting of the analysts, and the portfolio is quite diversified with typically 60 to 90 stocks, with a larger exposure to small and midsize companies than its peers.

“There are few formal constraints, although sectors above 10% of the benchmark cannot have more than a 5% underweighting or overweighting, and initial positions cannot be greater than 5% of total assets,” said Caquineau.

Named portfolio manager Gabrielle Gourgey provides oversight and cash flow facilitation, but doesn’t make investment decisions.

“The portfolio is built from a bottom-up perspective and stocks are selected by MFS’s 10 European research analysts in each sector. They can use their own models and research tools, and may be more-or-less sensitive to valuations, said Caquineau.

“The common thread, however, is to consider the quality of the business models and management team.”

Each analyst is responsible for two to three industries and meets with company management, competitors, customers, and suppliers. This is combined with sell-side research and input from industry consultants to create detailed earnings models.

The team evaluates the growth and return potential of a stock with a focus on pricing power, industry growth rates, free cash flow, and management strength. This is then combined with an assessment of business risks and finally a consideration of the appropriate valuation.

In practice, the sector deviations from the index have not been large, partly because of the majority voting system required for a stock’s addition or removal. Each analyst can add or trim existing positions by maximum 25 basis points every six months without needing a vote from the rest of the team.

The fund’s active share against the MSCI Europe has historically been around 70%.

“Investors are also unlikely to see dramatic portfolio moves in the short term given the collegial and long-term-oriented approach here,” said Caquineau.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 30 September 2021

Country allocation:

Source: Fund factsheets, 30 September 2021

Top 10 holdings:

Source: Fund factsheets, 30 September 2021

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