With U.S. equities experiencing a sharp downturn on Tuesday, it’s a reminder that overseas exposure within international markets can give investors the much-needed diversification their portfolios require, which is where the Franklin LibertyShares International Equity Model is of vital importance.
While U.S. capital markets have been the default investor play, particularly at the height of the extended bull market run, the deep declines on Tuesday evidenced by the Dow Jones Industrial Average losing as much as 800 points, makes the case for diversification abroad.
The Franklin LibertyShares International Equity Model is an asset allocation model, driven by Dorsey Wright’s Relative Strength Matrix that is comprised of Franklin Templeton’s passive suite of exchange-traded funds (ETFs). The ETFs provide exposure to various countries, including developed markets like Germany and Canada, while at the same time, provides the necessary exposure to emerging market countries like Brazil and Mexico.
With Franklin Templeton partnering with Dorsey Wright to create the asset allocation model, it represents the combination of the two firms leveraging each other’s investment management capabilities.
Highlights of the partnership include:
- The purpose of the model is to identify major themes in the international equity market, have exposure to those funds controlled by demand and eliminate exposure to those funds controlled by supply.
- This platform will give financial advisors the ability to streamline their investment process with technical tools, freeing up their time.
- Franklin provides low-cost, passive single country and regional ETFs that are considered within the model. As new passive ETFs are launched, they may be considered for inclusion.
“With the launch of our single country and regional passive ETFs, working with Dorsey Wright to leverage their unique methodology for constructing asset allocation models was a natural fit,” said Pierre Caramazza, SVP, Head of ETF Distribution. “International equities have challenged overall portfolio returns in the back half of this year, piquing interest in managing the related risks by identifying relative strength of countries and regions in the international equity market, maintaining exposure to those driven by price momentum and eliminating exposure to those exhibiting lower relative price momentum.
“Advisors are accustomed to the low cost of broad index funds, but have not been enamored with the returns. Our Franklin LibertyShares International Equity Model potentially allows them the best of both worlds, using Dorsey Wright’s disciplined, trend following approach and Franklin’s low-cost FTSE-indexed ETFs.”
Trade wars have certainly hampered certain areas of international equities, especially emerging markets, but their valuations relative to price offer investors excellent value propositions. With U.S. President Donald Trump and China president Xi Jinping agreeing to a ceasefire with their tit-for-tat trade war, these international markets will benefit even further should a tangible trade agreement come into fruition in the forthcoming months.
Dorsey Wright is responsible for all aspects of portfolio construction and ongoing management, including fund selection and asset allocation decisions. The strategy includes being 100% invested in one of the five ETFs available from its model inventory.
Furthermore, the model is to identify the relative strength of countries and regions in the international equity market space, maintaining exposure to those particular ETFs that are driven by price momentum. The model invests in the top five highest scoring ETFs from the inventory options and will rebalance that exposure only after the scores drop below the median.
“For us at Franklin Templeton, joining forces with providers such as Dorsey Wright is a relatively new initiative,” Caramazza added. “However, in keeping with our client-focus, we saw demand for low cost alternatives to broad passive indexes. We are managing that in-house with our active and smart beta ETFs, and working with outside providers like Dorsey Wright to build guided models using our passive single country and regional suite. These models are a logical extension of those same client demands.”
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