Franklin Templeton's belated entry into the European ETF market did not come as any surprise. Under pressure from a net outflow of funds under management in the past three years of $116bn, the manager moved away from its active heartland in the US last year with the launch of 11 ETFs and followed that up with a similar offering in Canada in May this year. Now in Europe, the LibertyQ UCITs range includes funds that cover global equities, US equities, US dividends and European dividends. ETF Stream spoke to Patrick O'Connor, the global head of ETFs at Franklin Templeton, about how the company hopes the new funds will leverage the company's differentiated approach to multi-factor investing.
What makes these funds different from the competition?
O'Connor says Franklin Templeton approached the creation of the LibertyQ indices in the same way it approaches quantitative stock picking. "We believe that just like discretionary stock picking, all factors are not created equal, some deliver better risk premia, and some are more correlated to certain outcomes," he says. "We believe that quality and value are the only factors that are truly fundamentally based and provide stable return potential going forward. As in our active management approach, we believe in buying high quality securities and making sure they are fairly-valued."
The rules-based Franklin Templeton proprietary methodology is based on multiple distinct factors - quality, value, momentum, and volatility - to create a custom index. The ETFs seek to deliver lower volatility and higher risk-adjusted returns than the market over the long term. "Most notably, we have enhanced our definition of quality to account for multiple characteristics of quality, including long-term performance and balance sheet strength," says O'Connor.
Why launch the funds now?
The company says the Franklin LibertyQ ETF initiative has been three years in the making and reflects a history of delivering high-conviction investment management while providing investors the option of higher risk-adjusted returns over the long term within an ETF wrapper. "We believe the European ETF market is still in its infancy and has plenty of scope to grow further," says O'Connor. "Smart beta assets grew 45% in the smart beta market and reflect how much the ETF market is evolving."
Why should investors consider using these ETFs?
The LibertyQ ETF platform is designed to complement Franklin Templeton's existing active management product range and to offer clients a broad range of investment solutions and vehicles with which to construct their diversified investment portfolios. "In fact, this is where the Liberty name originated - freedom of choice for our investors - and we want to make a variety of investment options available to them," says O'Connor.
What type of investor will these funds appeal to?
O'Connor says the company has seen encouraging demand for ETF products from various client types including institutional investors, retail, and particularly fee-based advisors.
What is the indices for each fund and how are they constructed?
The Franklin LibertyQ UCITS ETF range will offer investors access to the custom Franklin LibertyQ indices. These indices are constructed by custom weighting four factors - quality, value, momentum and low volatility - utilising an in-house custom proprietary model. The range includes two equity funds designed to pursue lower volatility and higher risk-adjusted returns than their investment universes and two income-focused funds designed to pursue stability of income and volatility reduction.
The Franklin LibertyQ Global Equity SRI UCITS ETF invests in stocks globally that are considered to be environmentally and socially responsible. It tracks the performance of the LibertyQ Global Equity SRI Index the constituents of which are selected from the MSCI AC World SRI Index using a multi-factor selection process, with a focus on quality stocks.
The Franklin LibertyQ US Equity UCITS ETF invests in large and mid-capitalisation stocks in the US and tracks the performance of the LibertyQ US Large Cap Equity Index4 the constituents of which are selected from the Russell 1000 Index using a multi-factor selection process, with a focus on quality stocks.
The Franklin LibertyQ Global Dividend UCITS ETF invests in high-quality stocks globally, with high and persistent dividend income. It tracks the performance of the LibertyQ Global Dividend Index the constituents of which are selected from the MSCI AC World exREITS Index using a dividend persistence and yield screen followed by a quality factor screen.
The Franklin LibertyQ European Dividend UCITS ETF invests in high-quality stocks with high and persistent dividend income in developed countries in Europe. It tracks the performance of the LibertyQ European Dividend Index4 the constituents of which are selected from the MSCI Europe IMI ex REITS Index using a dividend persistence and yield screen followed by a quality factor screen.