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Value investor Don Reed is in his 'sweet spot'

Who

Don Reed, president and chief executive officer of Franklin Templeton Investments Corp. and lead portfolio manager of the Templeton International Stock Fund.

The Strategy

To find promising but undervalued stocks of solid companies that are out of favour with investors, and hold them for the long term. Using proprietary screens, the organization comes up with about 1,200 names of international companies that it deems promising. Then the analysts go to work.

Including the emerging-markets group, they visited 3,100 companies last year, Mr. Reed says. "We're out there pounding the pavement where the companies are located."

With 35 years of experience in the business, Mr. Reed brings to the job that common sense - yet fearless - characteristic of the late John Templeton, founder of Templeton Growth Fund.

"I've been fully invested since the end of last year," he says. That was a bit early - markets dived again in late February - but that's typical of his approach.

In April, with stock markets signalling an economic recovery, Mr. Reed added Randstad Holdings NV of the Netherlands, a temporary staffing company. "When you think about it logically, people have been cutting staff. When everything starts to perk up and get a little bit better, they'll have to hire again," he notes. "But they won't hire permanent staff at first. They'll wonder if the recovery is for real and they'll hire people on a temporary basis. That plays right into the hands of the staffing companies."

When It Works Best

Value investors like to buy when everyone else is selling. As pessimism turns to optimism, their investments begin to pay off. "We're in our sweet spot right now," Mr. Reed says.

What Could Go Wrong

The assumptions underlying a stock purchase could change. "We're right about 65 per cent of the time," he says. "That's a darn good record in this business."

How Is He Doing?

The Templeton International Stock Fund is up 18.7 per cent this year, to Oct. 31. That compares with 12.6 per cent for its benchmark, the MSCI EAFE Index. Like most mutual funds, it did poorly in 2008, falling 36.1 per cent.

Market Outlook

Stock markets have staged an impressive rebound, but they have further to go, Mr. Reed predicts.

"Look at the U.S. market. From the peak in 2007 it was down 55 per cent." It has rallied more than 60 per cent and it still has more than 30 per cent to go before it reaches its old high, he says.

On the Toronto market, the S&P/TSX composite index fell 48 per cent, peak to trough. So far it has recovered about 50 per cent and still has about another 25 per cent to go, he says. "I go by the adage, you cut your losses and you let your profits run. If you are constantly trying to trade your portfolio, you're making a huge mistake."

This article first appeared in Globe Investor Magazine at tgam.ca/GIMAG

© 2007 The Globe and Mail. All rights reserved.

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