ETF Watch: Franklin Debuts Active Global Fund

New fund relies on local insight and has few constraints on where it can invest.

Today Franklin Templeton is adding another fund to its Liberty family of ETFs. The Franklin Liberty International Opportunities ETF (FLIO) is an actively managed fund that invests in markets that run the gamut in terms of development levels, from frontier to developed. It comes with a net expense ratio of 0.64% and is listed on the NYSE Arca exchange.

The fund is Franklin Templeton’s first actively managed international ETF.

“With over 75 percent of the world’s GDP coming from countries outside the U.S., investing internationally can provide portfolio diversification, which can reduce overall risk. As we believe successful international investing can benefit from combining a global investment perspective with local presence and insights, we are leveraging fundamental research from our local asset management and emerging markets teams around the world in managing this new ETF,” said Patrick O’Connor, global head of ETFs for Franklin Templeton Investments.

The prospectus notes that FLIO will invest in stocks of any size and will invest primarily in common and preferred stocks, although it can also invest in derivative and currency strategies. The fund’s manager will base investment decisions on “prevailing conditions and prospects” for the markets, and will generally aim to include securities from at least three different markets in the fund’s portfolio.

Although its benchmark is the MSCI All Country World ex-US Index, the prospectus notes that FLIO’s portfolio can differ significantly in terms of sector and country weightings and that it may not invest in the securities in its benchmark.       

Currently the fund has a nearly 45% weighting in European stocks and a 37% weighting in Asian stocks. Industrials is the largest sector, with a weighting of almost 19%.

Local Knowledge

The fund manager may also consult with local asset managers based in the regions in question who will serve as subadvisors to the fund, though the manager has sole discretion over the fund’s portfolio. The fund manager will use a bottom-up approach that relies on fundamentals and research, taking into account long-term earnings, asset value and cash flow potential in the context of a security’s price, while targeting companies that are “financially strong with favorable growth potential and sustainable competitive advantages,” the prospectus said.

“The local team is critical to the investment process. They’re the ones doing the research; they’re the ones who are on the ground to find the attractive stocks. They’re the ones who are providing those high-conviction ideas that then get rolled up to the main PMs who end up making the decision on the final portfolio,” said David Mann, Franklin Templeton’s head of capital markets, global ETFs.

FLIO is co-managed by Stephen Dover, CFA, the CIO of Franklin Templeton Local Asset Management and Templeton Emerging Markets Group, and by Purav Jhaveri, CFA, the managing director of investment strategy for the Local Asset Management group. In their roles, they can consult with Franklin Templeton’s 14 local asset management teams and the Templeton Emerging Markets Group, which includes more than 50 investment professionals.

Although there is a handful of actively managed global ex-U.S. equity ETFs, most do not have significant assets and very few have the latitude to invest in such a wide range of securities, instead focusing on very specific slices of the market. And most do not have local asset management teams providing the fund managers with suggestions.

The ValueShares International Quantitative Value ETF (IVAL) is currently the largest fund in the space, with some $43 million in assets under management and an expense ratio of 0.79%. IVAL covers about 50 names selected for their value and quality metrics. FLIO includes roughly 100 companies and is also the cheapest fund in the active global ex-U.S. ETF space.

Contact Heather Bell at [email protected].