Explaining Our Current Focus on Fixed Income

Edward D. Perks, CFA¹
Senior Vice President
Director of Core/Hybrid Portfolio Management
Franklin Global Advisors

FTIF Franklin Income Fund is presently allocated more toward fixed income securities than equities. The fund's allocations are dynamic as our management goal is to look for the best risk-adjusted opportunities to help us achieve the objective of high yield and potential for total return over the long term. About a year ago, we were near evenly split between our equity and fixed income allocations. Today, approximately two-thirds of the fund's portfolio is in fixed income and one-third is in equity investments.

We have been more attracted to opportunities in credit markets, mostly due to dislocations in those markets. Last fall, the tremendous correlation between credit and equity markets created a unique opportunity, in our view, and we used that period's volatility to increase the fund's fixed income holdings.

In addition, we have been finding attractive opportunities in investment-grade corporate bonds, as well as corporate bank-debt term loans, which have been an incremental part of the portfolio. There have also been select opportunities in high-yield corporates. We have seen a few companies in the portfolio move higher in the capital structure (reflecting less risk), but still positioned in securities aligned with the fund's objective. Overall, we feel the fund has been well-positioned for the current market environment.

Elsewhere, utilities continue to be a main staple of the fund's equity and fixed income holdings, representing a combined weighting of approximately 20%², although that is lower compared to the last several years. We continue to like the income opportunities offered in utilities, but there have also been recent challenges. Historically, the group has been more homogenous, but includes a more diverse set of companies today. Factors that influence them, such as commodity prices, exposure to carbon issues and climate change, and the traditional regulated utility framework— particularly in parts of the country where the economy is weaker—are creating difficulties for these companies. That said, we continue to believe there are high-quality, stable, well-managed utility companies that have a place in the portfolio.

Overall, we remain comfortable with our distribution rate and our core objectives of stable, attractive monthly income for investors and, secondarily, making sure we are invested in securities that maintain prospects for capital appreciation over the long term.

¹ CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
² As of 31 May 2009

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