Morningstar - Q2 2020 - 29

gMerge some mediocre funds into strong funds.
gBe sure that fundholders benefit as much

as stockholders.
gFund directors should focus on better management

and lower fees rather than protecting their
jobs. No, really.
What should investors in funds from the merged
companies expect? The good news is there
won't likely be immediate change. It takes a
while for a deal to be completed, and even after
that, there is usually some time before fund
mergers happen. This is also the bad news, though,
because it means you have to stay alert for
changes for about a year.

keep the funds but change the management
sleeves. The bonds can go to Western Asset's core
strategy, with maybe a little for Michael
Hasenstab's Gold-rated Templeton Global Bond
TGBAX. For equities, spread the large-cap
money across Silver-rated ClearBridge Aggressive
Growth LSIFX and the aforementioned ClearBridge
Large Cap Value and ClearBridge Appreciation.
Then get some exposure to small caps via
Silver-rated Royce Special Equity RSEIX and Bronzerated Franklin Small Cap Growth FSMLX. (Silverrated ClearBridge Small Cap Growth SBPYX is
closed to new investors.) Finally, adjust the equity
exposure to fit the benchmarks.

Where can Franklin upgrade some funds?
Some suggestions:

Franklin Income FNCFX could probably use a similar
upgrade, though with its income focus, it would
require some changes to dial up the income side.

The $5 billion Franklin Total Return FRERX rates
Average for People and Process and Neutral
overall. Merge it into the Gold-rated Western Asset
Core Plus Bond WACPX, which has lower fees
and High ratings for People and Process.

Now for the rebranding. Fund mergers often
lead to the adoption of a single name for branding
purposes. So, maybe FranklinTempletonWesternRoyceBridge. Better yet, no one is using
RiverSource anymore.

We're not big fans of the $1.9 billion ClearBridge
Value LMNVX. We give it a Negative Analyst
Rating. So, merge it with the $6.9 billion
ClearBridge Appreciation SAPYX. That Silver-rated
fund is cheaper. Yes, the Franklin-Legg Mason
deal didn't need to happen for this merger
to take place, but why pass up an opportunity to
upgrade funds?

Russel Kinnel is director of mutual fund research for
Morningstar Research Services and editor of Morningstar
FundInvestor.

ClearBridge All Cap Value SFVYX is rated Negative.
Merge that $1.6 billion fund into the $1.8 billion
ClearBridge Large Cap Value LCLIX, which is rated
Silver. True, the first fund is all-cap, with 61%
of assets under management in large caps, and
the second fund has 93% of assets in large
caps. It's not a perfect fit, but an upgrade to Silver
from Negative is worth it. The large-cap fund
is also 20 basis points cheaper.
Franklin isn't particularly good at core equities
or core bonds. Morningstar rates its Conservative
Allocation FTCIX and Moderate Allocation
FMTIX funds Neutral. Franklin Founding Funds
Allocation FFALX also gets a Neutral overall
rating but a Negative for its Process Pillar. Legg
Mason doesn't have comparable funds, so

U.K. Property Funds
Suspend Trading
G R E AT E R E U R O P E

United Kingdom

In March, a wave of property funds suspended
trading, highlighting concerns over whether
open-end funds are the right vehicle for illiquid,
direct property investments.
The Kames Property Income Fund suspended
trading on March 16, becoming the first open-end
fund to suspend trading since the coronavirus
outbreak. It was quickly followed by the Janus
Henderson UK Property Fund. Aviva Investors UK
Property Fund suspended trading on March 17 and
was followed by the Standard Life Investments UK

Real Estate Fund and Aberdeen UK Property Fund.
Threadneedle UK Property Fund then suspended
trading on March 18.
These are not like previous suspensions, such as
that involving M&G Property, one of the largest
property funds in the open-end sector. That
fund was gated on Dec. 4 over liquidity concerns
driven by an increase in investor redemptions,
and it has remained locked down since. (If too
many investors try to sell at once, a fund manager
may be forced into a fire sale of the buildings
the fund owns.) This time, it's because the
independent companies that value the properties
owned by these funds can't put an accurate
price on the assets.
Kames Property Income was one of the few
open-end property funds not to suspend trading
after the Brexit referendum in 2016, which
sparked widespread panic about the outlook for
the property market. It has typically held a
good chunk of its assets in cash to help protect
the fund from any investor redemptions and before
suspending had 17.7% of its portfolio in cash.
When the M&G fund suspended trading in
December, Morningstar looked at the cash levels
held by funds across the sector. Kames was
holding 14% cash, and some funds were holding
as much as 20% to 30% in liquid assets.
Is suspending trading the right thing to do?
Equity funds haven't done the same even though
they're enduring the same turbulence. But it
stands to reason that if prices on the stock market
are swinging wildly every day, making it hard to
properly price shares, then valuing a building is
going to be even harder. Funds that own shopping
malls and retail assets may be particularly
vulnerable in the current environment.
A Kames spokesman says that the suspension
of the fund was in the best interests of investors.
Janus Henderson stressed that its move was
not driven by liquidity concerns (the fund had
17.4% of assets in cash) but to "safeguard
the interests of investors."
The inability to value assets in the fund is
important because of new rules that came into

morningstar.com/lp/magazine

http://www.morningstar.com/lp/magazine

Morningstar - Q2 2020

Table of Contents for the Digital Edition of Morningstar - Q2 2020