Franklin Templeton Fixed Income Group Franklin Municipal Bond Strategy

Transcription

1 October 2014 Franklin Templeton Fixed Income Group Franklin Municipal Bond Strategy For Institutional Investors Only

2 TABLE OF CONTENTS I. TEAM OVERVIEW... 3 II. INVESTMENT PHILOSOPHY AND APPROACH... 5 III. INVESTMENT PROCESS... 6 IV. RESEARCH APPROACH... 8 Franklin Municipal Bond Strategy 2 of 10

3 I. PORTFOLIO MANGEMENT TEAM Franklin Municipal Bond Department Overview 1 Franklin Municipal Bond Department is one of the nation s largest municipal bond fund managers, with: $72 billion in municipal assets under management Two co-directors with an average of 27 years of experience 15 portfolio managers with an average of 20 years of experience 18 research analysts with an average of 17 years of experience 33 municipal bond strategies Municipal bond strategy lineup: Four nationally-focused strategies Limited-Term, Intermediate-Term, Long-Term, and Insured (closed) Two high yield strategies Federal and California specific 28 state-specific strategies Customized strategies to meet specific client goals The team is also responsible for recommending and implementing cross-over trades within the muni market for the taxable portfolios across the firm. Wide ranging expertise lends itself to broad mandates with specific goals that utilize a variety of specialties (i.e. IG/HY cross-over mandates) Experience managing municipal bond portfolios since 1977 including being a pioneer in state-specific strategies Municipal Bond Senior Team Member Bios: Sheila Amoroso is a senior vice president, co-director of the municipal bond department for the Franklin Templeton Fixed Income Group and portfolio manager of Franklin Federal Tax-Free Income Fund. Ms. Amoroso joined Franklin Templeton Investments in Ms. Amoroso holds a Bachelor of Science from San Francisco State University and an M.B.A. from Notre Dame de Namur University. She is a member of the California Society of Municipal Analysts and the National Federation of Municipal Analysts. Rafael Costas is senior vice president and co-director of the municipal bond department for the Franklin Templeton Fixed Income Group. He was previously director of municipal bond research. Mr. Costas joined Franklin in 1986 as a management trainee. He earned his Bachelor of Arts degree in Economics from the University of California at Santa Barbara and a master's degree in Finance from Golden Gate University. Mr. Costas is a past member of the California Debt and Investment Advisory Commission, past chairman of the California Society of Municipal Analysts, former board member of the National Federation of Municipal Analysts (NFMA), former chairman of the NFMA's Industry Practices and Procedures Committee. He also belongs to the Society of Municipal Analysts. 1. As of June 30, Municipal bond assets under management figure includes U.S. retail municipal bond fund assets and separately managed accounts. Franklin Municipal Bond Strategy 3 of 10

4 John Wiley is a senior vice president and portfolio manager of the Franklin California Tax-Free Income Fund, Franklin High-Yield Tax-Free Income Fund, Franklin California High Yield Municipal Bond Fund, Franklin California Intermediate-Term Tax-Free Income Fund and Franklin California Insured Tax-Free Income Fund. Mr. Wiley joined Franklin Templeton Investments in He earned his Bachelor of Arts degree in Economics from the University of California at Berkeley and a master's degree in Finance from St. Mary's College. Mr. Wiley is currently a member of the San Francisco Municipal Bond Club, California Society of Municipal Analysts and National Federation of Municipal Analysts. Tom Walsh, senior vice president and director of Municipal Bond Research for the Franklin Templeton Fixed Income Group. He is responsible for overseeing the credit analysis for the 36 Franklin Municipal Bond Funds including Franklin California Tax-Free Income Fund and Franklin California High Yield Municipal Fund. Mr. Walsh specializes in the analysis of a variety of tax or assessment-supported financings including, Mello-Roos, 1915 Act bonds, Community Development Districts, Marks-Roos Bonds, tax allocation, general obligation and lease financing. Mr. Walsh joined Franklin in He holds a Bachelor of Arts from the California State University at Chico and an M.A. in public administration from Golden Gate University in San Francisco. He is past Chairman for the California Society of Municipal Analysts and former board member of the National Federation of Municipal Analysts (NFMA). Organization Structure Designed to Promote Strong Collaboration Across the Team 2 SHEILA AMOROSO Co-Director, Senior RAFAEL COSTAS Co-Director, Senior John Wiley Senior Vice Present John Pomeroy Senior Thomas Walsh SVP/Dir. of Research Molley Butler VP, Manager of Research Stella Wong Michael Conn Carrie Higgins John Bonelli Assistant Portfolio Manager Rose Donatelli Portfolio Assistant James Conn, CFA Senior Francisco Rivera Christopher Sperry, CFA Daniel Workman, CFA Portfolio Manager Dulce Demee Investment Administration Associate Grace Cheng Robin Fisher Jennifer Johnston James Lucas, CFA Scott Owens, CFA Gregory Danielian Lawrence Pascal VP/ Robert Yolland Senior Michael Shepard Lisa Shirley, CFA Richard Smyth, CFA Amanda Stewart SEPERATELY MANAGED ACCOUNTS TEAM Megan Martin Kristen Schiltz, CFA Jeff Snyder VP, Dir, Senior Portfolio Manager SMA Muni Bonds Kelley Birch Vander Shanholt, CFA Drew Hayashi Senior Portfolio Analyst Dylan Sanderson SMA Portfolio Manager Nicholas Bucklin, CFA SMA Portfolio Manager 2. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. Franklin Municipal Bond Strategy 4 of 10

5 II. INVESTMENT PHILOSOPHY AND APPROACH With one of the largest municipal security research groups, Franklin conducts stringent credit analysis to seek undervalued municipal securities, and does not generally use speculative derivatives or leverage. Franklin s primarily buy-and-hold strategy can help to provide relative price stability and lower portfolio turnover, which can help to reduce realized gains and losses for the strategies. The strategies focus on income generation, while employing a strict credit analysis to all holdings. Focus on Income Franklin managers primary aim is to maximize tax-free income. Historically, the income return from municipal bonds has contributed much more to municipal bond returns than changes in municipal bond prices. Research-Driven Investment Process Our analysts are responsible for conducting research on credit-driven securities in the municipal market. They are responsible for evaluating an issuer s credit strengths and weaknesses and working with the portfolio managers on select fund purchase and sale decisions. We have the ability to research both investment grade and below investment grade issuers. The credit team is a key player in the management of muni portfolios working very closely with the portfolio team on a daily basis. Buy and Hold for the Long Term Franklin municipal bond managers are focused on seeking to maximize income; we typically don t actively trade bonds to try to capture capital gains. We typically sell holdings only if we see an opportunity to enhance the portfolio s income profile, to remove a weakening credit, or to meet a client liquidity need. Trading Advantage and Execution Due to the OTC nature of the municipal bond market, our size and history can give us an advantage when transacting in the market. We seek to leverage strong dealer relationships across the country for execution advantage. Due to our size and wide ranging strategy focus, we believe that we have an advantage versus smaller managers. Market Presence Given Franklin s presence in the municipal space, we can often work with issuers and underwriters to shape the structure of new bond issues. Further, we can work with issuers on an ongoing basis to better understand the current financial profile of the issuer. Franklin Municipal Bond Strategy 5 of 10

6 Well-Tenured Portfolio Management Resources 2 As you can see from the chart, the Municipal PM team at Franklin is a very well tenured team where a majority of the PMs have spent their entire careers with Franklin Templeton. TENURE (years) TITLE Sheila Amoroso 28 SVP/Co-Director Rafael Costas 27 SVP/Co-Director Stella Wong 32 VP/Portfolio Manager John Pomeroy 27 SVP/Portfolio Manager John Wiley 24 SVP/Portfolio Manager Carrie Higgins 23 VP/Portfolio Manager Francisco Rivera 19 VP/Portfolio Manager Christopher Sperry, CFA 18 VP/Portfolio Manager James Conn, CFA 17 SVP/Portfolio Manager Michael Conn 13 VP/Portfolio Manager Daniel Workman, CFA 10 Portfolio Manager John Bonelli 4 Assistant Portfolio Manager Jeff Snyder 16 VP/SMA Portfolio Manager Dylan Sanderson 10 SMA Portfolio Manager Nicholas Bucklin, CFA 6 SMA Portfolio Manager AVERAGE TENURE 18 years III. INVESTMENT PROCESS Macroeconomic View Formulation The Fixed Income Policy Committee (FIPC) establishes the long-term macroeconomic investment themes that guide the portfolio construction process across all fixed income strategies. The committee is composed of the CIO and other senior investment professionals based in London, New York, and California, representing the global fixed income markets. FIPC s meetings serve as a forum and can include input from our local asset management colleagues in India, Korea, China, U.A.E., and Brazil. Meetings alternate weekly between macroeconomic and sector discussions. At the macroeconomic sessions, the FIPC analyzes the factors impacting the global fixed income markets, such as economic output, monetary policy, duration/yield curve, global currency and geo-political trends, as well as fiscal policy. In the sector allocation meetings, the FIPC considers the insight of sector team leaders focusing on distinct market segments: Government, Credit, Mortgages/ABS, Municipals, Emerging Market Debt, and Bank Loans. Franklin Municipal Bond Strategy 6 of 10

7 Meeting reports distributed to the Fixed Income Group generally include the committee s views on the impact of economic and political factors on global fixed income markets, quantitative sector valuations, and sector weighting recommendations. Municipal Bond Investment Process The team uses a consistent, disciplined investment strategy, seeking to maximize tax-free income. Historically the income return from municipal bonds has contributed much more to municipal bond returns than changes in prices. The investment team generally employs a buy-and-hold approach and invests in securities it believes should provide the most relative value in the market. Bonds are not actively traded to try to capture capital gains, which may lead to realized gains or losses. Holdings are sold only if we see an opportunity to enhance the portfolio s income profile, to remove a weakening credit, or to meet a client liquidity need. Our fundamental investment approach focuses on a sector-specific, transaction-driven model. Each analyst follows between one and three sectors and works with all portfolio managers in the assessment of primary and secondary market transactions and in the monitoring of current holdings. The research team focuses on creditdriven bond issues with the potential to provide the most value-added benefit for the portfolio. Site visits are often a part of both assessing primary market transactions and monitoring current holdings. On a daily basis, the following current market conditions are generally analyzed: Trading activity Yield spreads Call option spreads New offerings Secondary market offerings Credit ratings Event risk Franklin searches for high-quality, undervalued bonds that can provide a high level of income until maturity. The portfolio is constructed with diversification in mind to help mitigate interest rate risk, taking into consideration allocations to sectors, regions, coupons, call, maturities and quality, as appropriate. We do not make significant shifts solely based on market conditions, but rather look for the best relative value in the marketplace from an income-oriented perspective. Neither leverage nor exotic derivatives are generally used, nor are techniques that we believe could add volatility and contribute to underperformance in adverse markets. We seek to stay fully invested to maximize the income earnings for the portfolio. The Franklin muni process and team structure lends itself well to customized mandates. Currently the team manages a customized muni mandate for a life insurance company focused on a specific area of the market that they are unable to access with their in-house resources. This mandate is a customized muni mandate with flexibility to invest in both investment grade and below investment grade munis with a specific yield and spread target. The depth and breadth of the Franklin muni team has lent itself well to pursuing the client s goals and uncovering value for their target. The portfolio management, product management, and relationship management teams have worked closely with the client to determine customized reporting needs, provide market insight for board members, assist in the impairment process (as necessary), and work to develop a customized funding schedule to make sure the cash balance was able to be invested in a timely manner. All of this has been accomplished with a frequent, open line of communication and the ability to gather the appropriate resources in a short time period to address any client question or concern. Given our process and team structure, we believe this type of activity can be scaled across a variety of mandates and client needs. Franklin Municipal Bond Strategy 7 of 10

8 Risk Management Risk management is integral to the municipal bond investment process. The Municipal team s strict internal credit analysis and broad diversification among sectors and issuers are the primary methods of controlling risk in the portfolios. Each exposure is analyzed for its stand-alone risk, as well as its contribution to overall portfolio risk, taking into account the correlation with other portfolio exposure. Credit and default risk are managed predominantly by investing in credits which are believed to be stable or improving, and generally limiting concentration in any one issuer. Any security with meaningful deterioration of credit quality is reevaluated regarding prospects for continuing debt service. We generally seek to have portfolios that are well diversified from a geographical, sector, sub-sector, and issuer perspective. We continually review municipal bond portfolios seeking to limit exposure to any issuers facing fiscal or market stress. Through sector diversification, bonds generally can be purchased across the spectrum of general obligation, revenue bonds, and essential service revenue bonds. IV. RESEARCH APPROACH The credit research process includes a review at time of purchase of both primary and secondary market offerings. Research and portfolio management teams are very closely aligned through communication throughout each trading day. This includes working together on relative value opportunities. In addition to time-of-purchase reviews, the team is also reviewing the credits held in portfolios periodically taking into account new financial information and market conditions. The research process centers around a sector-specific, transaction-driven model. Each analyst typically follows one sector and works with all of the portfolio managers in assessing primary market transactions, secondary market transactions and surveillance of current holdings. The research analysts focus on credit-driven bond issues (rated A or below) where we believe they can provide the most valueadded benefit to the portfolio managers and their portfolios. Our 18 analysts typically cover over 2,700 obligors (unique credits). In FY 2012, in addition to writing over 1,100 surveillance reports for current holdings, we reviewed almost 400 transactions (primary and secondary offerings). Franklin Municipal Bond Strategy 8 of 10

9 Robust Credit Research Resources As you can see in the chart below, the Portfolio Managers are supported by a group of well tenured and experienced research analysts. Given the broad nature of today s muni market, we believe this support is key to high-quality muni portfolio management. TENURE (years) Thomas Walsh 28 SVP/Director of Municipal Research Robert Yolland 24 Hospitals Grace Cheng 23 Higher Ed/Insurance Scott Owens, CFA 23 IDBs Richard Smyth, CFA 23 Housing/Insurance Molly Butler 21 Cogeneration/Utilities Jennifer Johnston 20 GO/COP s/leases/tobacco Lisa Shirley, CFA 19 Mello-Roos/SABs Michael Shepard 19 Transportation James Lucas, CFA 19 Mello-Roos/SABs Robin Fisher 17 Hospitals Lawrence Pascal 16 Tax Allocation Amanda Stewart 11 LT Health Care Kristen Schiltz, CFA 8 Money Funds-Notes/Water, Sewer Vander Shanholt, CFA 7 Higher Ed/Electric Utitlies Megan Martin 7 GO/COP s/leases and Money Funds Kelly Birch 4 Transportation Gregory Danielian 3 Water, Sewer and Money Funds AVERAGE TENURE 16 years Franklin Municipal Bond Strategy 9 of 10

10 Important Legal Information This information is intended solely for institutional investment management consultants interested in Franklin Templeton institutional investment advisory services. Various account minimums or other eligibility qualifications apply depending on the investment strategy. This document has been prepared for circulation to persons reasonably believed to be within one of the professional or qualified investor exemptions contained in the applicable regulations of their jurisdiction or to whom this document may otherwise lawfully be communicated to give preliminary information about the investment advisory services described herein. It is a confidential communication to, and solely for the use of, such persons and is not intended for public or financial advisor distribution. This material is not an offer to buy or sell securities or an offer of investment advisory services and is not intended to be, nor should it be used as, investment advice; it may not be copied or distributed without the prior written consent of Franklin Templeton Investments. Opinions expressed are current opinions as of the date appearing in this material only. The services described herein would be provided to insurance companies or accounts of, or affiliated with, insurance companies; such services would not provide any insurance or guarantee for the subject assets principal value will fluctuate and may be lost. All investments are subject to risks and investment strategies may not achieve the desired results. Franklin Advisers, Inc. One Franklin Parkway San Mateo, California Copyright 2014 Franklin Templeton Investments; All Rights Reserved Franklin Municipal Bond Strategy 10 of 10