TORONTO (GlobeinvestorGOLD) --Attendees at last month's annual meeting of the Templeton Growth Fund found tucked in their loot bags a glossy sheet of sage investment advice from the fund's founder, Sir John Templeton.
Sir John passed away a couple of weeks before the meeting at the ripe old age of 95. But his value approach to stock selection continues to form the basic philosophy of the group that bears his name, which is now part of the Franklin Templeton empire.
So it was hardly surprising that that hundreds of people at the fund's annual meeting in Toronto's Roy Thomson Hall were treated to a retrospective of his career and left with a page of his financial homilies to ponder as they read the latest depressing news from the markets. Among them:
"Too many investors focus on outlook and trend; therefore more profit is made by focusing on value."
"In the stock market, the only way to get a bargain is to buy what most investors are selling."
"To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest potential reward."
As I have pointed out before, these are difficult times for value managers. The bull market that began in late 2002 was largely commodities-driven, especially in Canada. However, value investors, by their nature, tend to play down commodity stocks because of their cyclical nature. As a result, most have lagged behind the growth and momentum managers in recent years.
Look at the flagship Templeton Growth Fund, for example. On the flip side of the page of quotes from Sir John was a depiction of the fund's famous "mountain chart," showing how $10,000 invested in 1954 would have grown to almost $6.3-million as of May 31 of this year. It looks impressive at first glance but on closer scrutiny an alert investor might be moved to ask: "But what have you done for me lately?"
The short answer is: "Not much." The fund lost 16.6 per cent in the year to June 30. Over the past decade, the average annual compound rate of return is a meagre 1.5 per cent. To be fair, the rise of the loonie was a major factor in these dismal results. In U.S. dollar terms, the fund looks a lot better with an average annual gain of 5.1 per cent over 10 years and 12.2 per cent over the past five.
So what do you do if you are organizing an investment extravaganza under these conditions? Simple: You refocus on the core words of Sir John's philosophy: "Buy low." Speaker after speaker talked about on the great bargains they are finding in today's markets.
"The world is not coming to an end," reassured Templeton Growth Fund manager Lisa Myers. "Times of uncertainty are also times of opportunity." Price-to-earnings ratios in key world markets are near their 20-year low, she said. Top-quality companies like Microsoft, AIG, Merck, Oracle, Vivendi, and Siemens are on offer at discount prices.
The notable absentees from the financial bargain basement include China, Brazil, and Canada, all of which enjoyed a strong run in recent years. But now they've become overpriced, so it's time to shift gears, Ms. Myers says. Templeton Growth does not have significant positions in any of the three countries, choosing to zero in instead on the United States and Britain.
Despite the recent weak results, the logic makes sense, especially here in Canada. The S&P/TSX composite index has enjoyed a great run but it was largely fuelled by three sectors: financials, energy, and materials. The fallout from the on-going subprime mess has knocked the stuffing out of the financials. Energy stocks pulled back when the price of crude oil turned down. Materials shares have lost some of their lustre. Without at least one and preferably two of those groups providing a lift, the TSX appears destined to struggle for a while.
So the Templeton message of global diversification combined with their buy low and be patient approach makes sense. But you must be prepared to stay the course. That may mean enduring more losses for a while, although you can reduce that risk by moving some assets into bond and money market funds. The markets will turn and value investing will come back into favour at some point. When that happens, the bargains that Lisa Myers and her colleagues are finding today will translate into strong returns. But no one can predict when that will be.
"Bull markets are born on pessimism," Sir John said. What he did not tell us was the length of the gestation period.
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