TIP SHEET: Franklin DynaTech Fund Seeks Innovative Plays for Long-Term Growth
First Published Saturday, 30th June 2012 10:00 pm - © 2012 Dow Jones
(This article was originally published Thursday.)
--Fund includes Apple, Google and Intel
--Managers evaluate potential to double revenue, earnings per share or free cash flow in five years
--Fund's annualized return over the last three years was 17.1%
By Andrew R. Johnson
The managers of the Franklin DynaTech Fund (FKDNX) are as focused on the sustainability of a stock's growth as they are on the growth itself.
To ferret out a company with long-term growth potential from a flash in the pan, the fund's managers are constantly engaged in a "right-brain exercise of growth investing, which is the more fundamental side," said Matthew Moberg, a vice president with Franklin Templeton Investments and one of the DynaTech fund's two portfolio managers.
Over the last three years, the fund has seen an annualized return of 17.1%, more than three percentage points above its category, according to Morningstar.com. Over the last 10 years its annualized return has been 7.7%, beating its category by more than two and a half points.
The fund's mandate is broad by design, though it seeks companies that can double revenue, earnings per share or free cash flow in five years. And it looks to technology companies, as well as those that are proven innovators in their respective industries, for that growth.
"The DynaTech fund focuses on innovation and growth, and we keep pretty much a laser focus on that," Mr. Moberg said. "We would say that's new technology, new science and companies that are benefiting from changing competitive environments and have new products and sometimes even new management. We're focused on really resilient business models and those that are disrupting the status quo.
"We'll look at the competitive environment, our confidence in that and our confidence in the business model itself," Mr. Moberg added.
Moberg said he and his partner, Rupert H. Johnson Jr., who has managed the fund since its founding in 1968, consider growth acceleration, expanding margins and improvements in return on invested capital when evaluating picks.
The fund's biggest holdings include some of the largest technology names, including Apple Inc. (AAPL), which is 8.69% of the fund, Google Inc. (GOOG) and Intel Corp. (INTC). It also has a bet on energy, including FMC Technologies Inc. (FTI), which represented 2.07% of the fund as of May 31.
"We believe FMC Technologies fits the portfolio because it pushes the boundaries of what was previously thought unachievable," Mr. Moberg said, adding that the company's subsea equipment can lay on sea beds two miles deep and extract oil that lies another mile below the sea floor.
Founded in 1968, the Franklin DynaTech Fund had 110 holdings as of May 31. Last year the portfolio's turnover rate was 26%, which Mr. Moberg said implies about a four-year holding period.
"We're really trying to invest in them for the long period," Mr. Moberg said.
Mr. Moberg cited MasterCard Inc. (MA) and Visa Inc. (V) as examples of companies whose core business models are benefiting from fundamental shifts in consumer behavior. As more consumers shift from cash and checks to credit and debit cards, the companies--which help process transactions for banks that issue their cards--have seen an increase in transaction volume over their networks.
"The amount of volume that is being put on these networks is quite high," Mr. Moberg said, noting DynaTech held the stocks through the recent implementation of provisions under the Dodd-Frank Act financial oversight law that affects debit-card processing.
MasterCard was the fourth-largest holding of the fund, representing 2.27%, and Visa was the fifth-largest, representing 2.23%, as of May 31.
The portfolio includes a number of stocks that are attractive from a "valuation standpoint," said Todd Rosenbluth, a mutual fund analyst for S&P Capital IQ. "You're not getting only pure technology, you're getting a collection of growth-oriented companies that have a technology component to them."
(Andrew R. Johnson covers the consumer lending industry for Dow Jones Newswires. He can be reached at 212-416-3214 or by email at firstname.lastname@example.org.)
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