The Templeton Approach

Bradley Radin, CFA ¹
Executive Vice President
Portfolio Manager/Research Analyst
Templeton Global Equity Group
Templeton Investment Management

Templeton's investment approach focuses on the "mispricing" of companies by the market. We seek companies that are under-appreciated by investors, as short-term "noise" and sentiment overshadow what we determine them to be worth based on our estimation of future earnings growth, free cash flow generation or underlying asset values. When doing so, we try to take advantage of the market's short-term focus by applying a longer-term investment horizon.

Our approach to small-cap stocks is exactly the same as our approach to larger stocks. However, smaller companies tend to have certain unique features. In general, small-cap stocks are under-researched, with significantly less sell-side coverage. This, along with the asset class's lower liquidity and higher price volatility, often leads to greater inefficiencies in valuations and provides what we feel are better opportunities for identifying mispricings.

Small caps also generally offer stronger growth potential-since it is typically easier to realize growth from a smaller base-and simpler business and capital structures, which can lead to more straightforward accounting and fewer opportunities for irregularities. Often, they also have better corporate governance, since many managers are also owners with interests closely aligned with those of their shareholders.

Finally, small caps are attractive to fundamental stock-pickers such as Templeton because company-specific factors generally dominate over macro ones, a feature that suits our bottom-up, research-driven investment process well.

As far as risk, small caps certainly carry higher risk than large-cap stocks and have historically fared worse in market downturns. However, they also typically provide greater upside when circumstances change for the better. We manage this risk primarily through the quality of our research, which includes detailed analysis of a company's financial statements-cash flow, balance sheet, income statement and more-as well as a qualitative evaluation of its competitive position, management and commitment to creating shareholder value.

This rigorous evaluation of each potential holding-on both a quantitative and qualitative basis-is our first line of defense against risk. As the late Sir John Templeton, our founder, said, "An idea is only an idea until you subject it to hard work." That's a statement we take to heart when seeking value in companies of any size.

Please click here for more information on the FTIF-Templeton Global Smaller Companies Fund.

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