(This article was originally published Thursday.)
--Fund includes Apple, Google and Intel
--Managers evaluate potential to double revenue, earnings per
share or free cash flow in five years
--Fund's annualized return over the last three years was
17.1%
By Andrew R. Johnson
The managers of the Franklin DynaTech Fund (FKDNX) are as
focused on the sustainability of a stock's growth as they are on
the growth itself.
To ferret out a company with long-term growth potential from a
flash in the pan, the fund's managers are constantly engaged in a
"right-brain exercise of growth investing, which is the more
fundamental side," said Matthew Moberg, a vice president with
Franklin Templeton Investments and one of the DynaTech fund's two
portfolio managers.
Over the last three years, the fund has seen an annualized
return of 17.1%, more than three percentage points above its
category, according to Morningstar.com. Over the last 10 years its
annualized return has been 7.7%, beating its category by more than
two and a half points.
The fund's mandate is broad by design, though it seeks companies
that can double revenue, earnings per share or free cash flow in
five years. And it looks to technology companies, as well as those
that are proven innovators in their respective industries, for that
growth.
"The DynaTech fund focuses on innovation and growth, and we keep
pretty much a laser focus on that," Mr. Moberg said. "We would say
that's new technology, new science and companies that are
benefiting from changing competitive environments and have new
products and sometimes even new management. We're focused on really
resilient business models and those that are disrupting the status
quo.
"We'll look at the competitive environment, our confidence in
that and our confidence in the business model itself," Mr. Moberg
added.
Moberg said he and his partner, Rupert H. Johnson Jr., who has
managed the fund since its founding in 1968, consider growth
acceleration, expanding margins and improvements in return on
invested capital when evaluating picks.
The fund's biggest holdings include some of the largest
technology names, including Apple Inc. (AAPL), which is 8.69% of
the fund, Google Inc. (GOOG) and Intel Corp. (INTC). It also has a
bet on energy, including FMC Technologies Inc. (FTI), which
represented 2.07% of the fund as of May 31.
"We believe FMC Technologies fits the portfolio because it
pushes the boundaries of what was previously thought unachievable,"
Mr. Moberg said, adding that the company's subsea equipment can lay
on sea beds two miles deep and extract oil that lies another mile
below the sea floor.
Founded in 1968, the Franklin DynaTech Fund had 110 holdings as
of May 31. Last year the portfolio's turnover rate was 26%, which
Mr. Moberg said implies about a four-year holding period.
"We're really trying to invest in them for the long period," Mr.
Moberg said.
Mr. Moberg cited MasterCard Inc. (MA) and Visa Inc. (V) as
examples of companies whose core business models are benefiting
from fundamental shifts in consumer behavior. As more consumers
shift from cash and checks to credit and debit cards, the
companies--which help process transactions for banks that issue
their cards--have seen an increase in transaction volume over their
networks.
"The amount of volume that is being put on these networks is
quite high," Mr. Moberg said, noting DynaTech held the stocks
through the recent implementation of provisions under the
Dodd-Frank Act financial oversight law that affects debit-card
processing.
MasterCard was the fourth-largest holding of the fund,
representing 2.27%, and Visa was the fifth-largest, representing
2.23%, as of May 31.
The portfolio includes a number of stocks that are attractive
from a "valuation standpoint," said Todd Rosenbluth, a mutual fund
analyst for S&P Capital IQ. "You're not getting only pure
technology, you're getting a collection of growth-oriented
companies that have a technology component to them."
(Andrew R. Johnson covers the consumer lending industry for Dow
Jones Newswires. He can be reached at 212-416-3214 or by email at
andrew.r.johnson@dowjones.com.)
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