Franklin Portfolio Review: 21 July 2023

Hiking near Metolius River in Central Oregon.

Normally I hold off reviewing portfolios until we are an hour or so into a business or trading day.  Instead I selected the Franklin as a good example to follow up on the Bullish Percent Indicator data published earlier this morning.  When I last checked, the Franklin was the poorest performing Sector BPI portfolio and it is outperforming the S&P 500.  There is very little cash available so no buying or selling is anticipated.  I’ll go into as much detail as is necessary for new readers to understand how the Sector BPI portfolios operate.

Franklin Investment Quiver and Holdings

Below is the current investment quiver and holdings for the Franklin.  Thanks to Harry and David, the ITA downloading file is correctly pulling in description and yield data.

The green arrow points to the “ideal” percentage to invest in the different securities.  The red arrow points to the actual percentage held in the different ETFs.  The percentage for the different sector ETFs is calculated by multiplying a coefficient times the three-year volatility of the ETF.  For example, this works out to 10.7% for VCR.  Energy (VDE), with 35 shares in the Franklin is over-subscribed by nearly double.  This overage occurred when VDE became a buy and I was using the old model for calculating the Max Asset Allocation.  Using the new calculation, the sum of the percentages for the eleven sectors adds up to something close to 100%.

Franklin Security Recommendations

Based on the current BPI data no sector ETFs are recommended for purchase.  If cash were available we would run down the Rank list for VOO, ESGV, SPY, VTI, VEA, VWO, BND, AGG, and SHV.  Since VOO ranks #1 available cash would go to pick up more shares of this ETF.  The cost of one share of VOO is greater than the available cash so no action is called for.

Franklin Manual Risk Adjustments

For a moment assume cash is available and no sector ETFs are recommended for purchase.  In the above worksheet VOO is #1, ESGV is #2 and SPY and VTI are tied at #3.  Now move to the Franklin Manual Risk Adjustments shown below.  VOO holds 5 shares and only three are recommended so VOO is oversubscribed.  We then move on to ESGV or the #2 ranked ETF.  ESGV holds 17 and only 15 are recommended so it too is oversubscribed.  We move on to SPY and VTI.  SPY holds 3 shares and that is also the recommended number.  This leaves VTI so an order for 6 shares is placed, assuming there is sufficient cash to purchase this many shares.  While it is highly unlikely excess cash is still available, if it is we would move to add more shares of VEA.

Franklin Performance Data

Over the past 18.7 months the Franklin is topping the SPY benchmark as well as all other possible benchmarks listed below.  It will not be easy to maintain a delta over the S&P 500, particularly if we enter a strong bull market.  While I don’t have sufficient data to draw any conclusions, my “gut” feeling is that Sector BPI portfolios will outperform SPY in bear markets, but lose ground to the SPY benchmark in bull markets.

Franklin Risk Ratios

Of note is the movement of the Jensen Performance Index (Jensen Alpha) back into positive territory.  This despite the increase in the risk-free short-term treasury interest rate.  Another positive signal is the positive (0.91) slope of the Jensen.  All risk values, with exception of Omega, are higher than they were last July.

Based on annualized IRR performance data and the risk measurements shown below, the Sector BPI model is working as expected.

Tweaking Sector BPI Plus Model: 20 May 2023