Investors need to take a longer-term perspective when evaluating the state of the U.S. equity market and recognize that last fall's presidential election caused it to snap out of a generally listless two-year phase, says Ed Perks, chief investment officer of Franklin Templeton Equity, a unit of San Mateo, California-based Franklin Templeton Investments.
"The economic expansion, post-financial crisis, was more of a muddle-through type of market. If you go back to early 2015, it had not significantly appreciated since then," says Perks, lead manager of the $208-million Franklin U.S. Monthly Income. "It's interesting to focus on both the challenges that markets faced coming out of the crisis period and how conditions have recently pivoted to higher inflation and potential pro-growth policies proposed by the U.S. government."
After a period of lacklustre earnings growth, says Perks, companies have the real potential to show an inflection toward higher growth. "In that context, the corporate fundamentals are pretty healthy and the market does not look unreasonable, particularly when you look at valuations today, relative to historical ranges."
While Perks is bullish on longer-term prospects, he was holding about 20% cash as of late February, after taking some profits during the post-election market run-up. "In our multi-asset strategy, every decision is relative to other opportunities available to us at the time. In context with the potential for higher rates and the risk this entails for the broader fixed-income market, we believe equities remain fairly attractive compared to more interest-sensitive asset classes."
However, the fund has cut back on stocks. A year ago, there was 61% in equities, 35% bonds and little cash. Currently, it holds 45% in equities, 35% bonds and 20% cash. "We are slightly tilted to equities," says Perks. "Encouragingly, after a period of a narrow opportunity set for our income-oriented strategy, we are seeing a broadening opportunity set."
A cornerstone of Perks' strategy is to focus mainly on income-producing securities, and across a wide range of asset classes, some of which seemed unconventional several years ago. "When I first started to manage the U.S. version of the fund in 2002, it was more difficult on the equity side because there were fewer U.S. companies focused on paying dividends and growing them over time. We were far more dependent on certain sectors, such as utilities and even real estate investment trusts."
Today, Perks notes that a significantly larger number of stocks comprising the S&P 500 Index have dividend yields that are higher than benchmark U.S. 10-year Treasury bonds, which yield about 2.4%. "It is not something we have seen historically," says Perks.
Some of the technology stocks in the portfolio include 
Microsoft Corp. (MSFT) and Intel Corp. (INTC), which yield 2.4% and 2.9% respectively. "These names have given us a pretty attractive opportunity," says Perks, who has been with the Franklin Templeton organization since he graduated from Yale University in 1992 with a BA in economics and political science.
As for financial services, Perks observes that yields have been slow to recover from the financial crisis, yet the trend to higher long-term interest rates will benefit net interest-rate margins by banks and increase the profitability of many institutions. "There is also the potential for eliminating further regulatory requirements, which have generated significant costs for the sector. Ultimately, that will translate into a bit more opportunity for financials to return capital to shareholders. As a result, dividend growth could be among the highest in that sector, as we move forward."
Two banks in the fund's top 10 positions include Wells Fargo & Co. (WFC), which yields 2.7%, and JPMorgan Chase & Co. (JPM), which yields 2.3%.
Within the theme of unconventional dividend-rich names, Perks also favours energy stocks such as Chevron Corp. (CVX), a leading integrated oil producer. "We like their assets because of the balance between upstream and downstream activities," says Perks, who believes the recent pullback in the price of crude oil will help to keep global supply and demand in balance. "Last year, people questioned whether the dividend was sustainable and in fact Chevron increased it late in the year. Today, the yield is about 4%."
When it comes to fixed income, Perks is invested exclusively in corporate bonds, with a recent weighted average duration of 3.8 years. One favourite issuer is hospital operator Tenet Healthcare Corp.
Perks notes that investors have been concerned about uncertainties related to the future of Obamacare -- the Affordable Care Act -- which might leave more people uninsured. This would be a burden for hospitals like Tenet, which would have to bear the cost of treating those people.
"We understand these risks and take a holistic view of all companies in which we invest," says Perks. The fund holds several issues of Tenet, whose yields range around 6% to 7%. "With Tenet, we believe it has taken important steps to manage these risks including diversifying into out-patient care facilities and other health business opportunities."
