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By Jeff Holt, CFA | 06-26-2015 11:00 AM

Searching for Income From the Bottom Up

Bronze-rated Franklin Income--the biggest fund in Morningstar's conservative allocation category--takes a multi-asset, bottom-up approach to income investing.

Jeff Holt: Hi, I'm Jeff Holt, analyst with Morningstar Manager Research. Today I'm joined by Ed Perks, portfolio manager of [Bronze-rated] Franklin Income. Today we're going to dive into some of the distinguishing features of that fund.

Ed, as its name implies, Franklin Income has an income objective, but it doesn't just focus on fixed-income securities. It also invests in stocks. Can you highlight the benefits and risks of having a diversified multi-asset income portfolio to meet your income needs?

Ed Perks: As we approach investing for income, we do have a secondary objective in the Franklin Income Fund of also maintaining prospects for capital appreciation. So our orientation is really to look across a very broad range of asset classes and security types to identify the unique opportunities that will help us meet that objective.

We do think there are a lot of benefits. First, it's an interesting question around what might the risks be of a diversified income approach. Clearly something that we're facing today in financial markets is the prospect and potential for interest rates to rise over time. So I think one of the potential pitfalls or risks of a diversified income approach could be that that factor--the potential for rising interest rates to be damaging to the portfolio's performance--is something that actually can affect multiple asset classes and not just fixed-income securities.

The example would be, if you're an income investor and you've strayed away from fixed income into very yield-oriented equities that are sensitive to potentially a rise in rates, that actually can be highly correlated to other parts of the portfolio.

Our approach is really, and will certainly benefit from, having a very flexible mandate as we pursue our objective. Our orientation, and we think the real benefit, is being able to tap the resources that we have through our equity research, through our credit research, and insights into all the fixed-income markets to have a diversified portfolio that can respond and deliver on our objective for our investors in a range of financial market conditions.

Holt: You mentioned you have a lot of flexibility to move between the asset classes. What drives when you have a higher position in equity? I know your traditional equity position has ranged between 50% and 20% of the portfolio over the last 10 years. What drives the allocation differences?

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