Franklin Income Has Its Perks

Key Morningstar Metrics for Franklin Income

• Morningstar Medalist Rating: Neutral
• Process Pillar: Average
• People Pillar: Average
• Parent Pillar: Average

Franklin Income’s managers can reliably execute this fund’s main objective of delivering high income, through a pliable and opportunistic process.

A trio of managers navigate Franklin Income’s asset allocation, sector exposures, and security selection decisions. Ed Perks has been steering this fund since 2002. The multi-asset income-investing veteran is supported by comanagers Todd Brighton and Brendan Circle, who were named managers in March 2017 and February 2019, respectively. Along with a support staff of six research and investment-focused teammates, they dedicate their time and expertise to income-focused strategies. The group has access to Franklin’s analyst teams across asset classes, including equity and fixed income, as well as the numerous investment teams across Franklin’s subsidiaries. These resources are adequate to support the team’s investment process, though they don’t necessarily stand out compared with those of peers.

To meet its income objective, the managers mainly invest in an evolving mix of dividend-paying equities, bonds, and equity-linked notes. The managers’ benchmark is a 50/50 stock/bond split, but they currently favor bonds for their income. Similar to other income-focused multi-asset funds, credit risk plays a key role here. For example, as of June 2024, Franklin Income’s high-yield exposure makes up 38.6% of the bond portfolio, sitting nearly 22 percentage points above its typical moderate allocation peer. Notably, this is lower than its custom benchmark, which has 50% of the bond portfolio in high yield (50% MSCI USA High Dividend Yield/25% Bloomberg US Aggregate/25% Bloomberg High Yield Very Liquid). The portfolio’s high-yield exposure has been coming down since the end of 2021 as credit spreads have tightened and investment-grade corporate bonds have become more attractive.

Still, the higher credit risk means the portfolio is riskier than its low equity exposure might suggest. For example, over the trailing 10 years through October 2024, Franklin Income had a beta of 0.57 when measured versus the S&P 500, which puts it in line with other moderate-allocation peers. More recently, the team has managed the volatility well. The US fund’s five-year standard deviation of 11.5% is lower than the US moderate-allocation category average.

Management has delivered a substantial income stream to shareholders. The 12-month yield of the R6 shares, the US-domiciled fund’s cheapest share class, averaged 5.4% for the three years ended September 2024. That’s significantly higher than the average multi-asset income fund’s 3.9% yield over the same period.

Franklin Income: Performance Highlights

Franklin Income delivered strong performance over the trailing three years through October 2024, relative to its moderate-allocation peers, custom benchmark, and category index, the Morningstar Moderate Target Risk Index, largely due to its outperformance in 2021 and 2022, when it beat more than 90% of peers during each year. Notably, its risk-adjusted returns, measured by the Sharpe ratio, were equally impressive. Its shorter duration profile, lower equity exposure, and income from its equity-linked notes were some of the contributors to its outperformance. Although investors shouldn’t overemphasize short-term results, the fund’s performance during the turbulence was laudable.

The fund’s longer-term performance has been more middling compared with the relevant benchmarks. Over the trailing five-year period, Franklin Income’s 7.2% annualized gain outpaces the 5.0% return of its custom benchmark but trails the typical moderate-allocation peer’s 7.4% return. Beating its custom benchmark shows the managers can deliver on their stated objective, but the fund struggled over extended periods of time. For example, over the trailing 10-year period, it underperformed all three relevant benchmarks.