Franklin Templeton's Ed Perks on Fixed Income Investing

What It Covers

Ed Perks, CIO of Franklin Income Investors and lead portfolio manager of the 75-year-old Franklin Income Fund since 2004, covers multi-asset income investing across fixed income, equities, convertibles, and private credit, explaining how cross-asset analysis, capital structure flexibility, and income-focused positioning navigate today's volatile policy-driven market environment.

Key Questions Answered

• •Capital Structure Arbitrage: Between 30-40% of Franklin Income Fund holdings involve owning multiple layers of the same company's capital structure simultaneously — bonds, equity, and convertibles. When rates surged from 2% to 5-5.5% on investment-grade bonds while stock valuations held flat, the same company's debt became dramatically more attractive than its equity, creating a reallocation opportunity within a single portfolio position.
• •Credit Quality Positioning: Within high yield, targeting BB-rated bonds over lower-quality B-minus and CCC paper reduces exposure to volatile investor bases and distressed dynamics. Rating agencies lag fundamental reality by a significant margin, so running proprietary credit analysis to identify companies improving their balance sheets before an upgrade is announced generates excess return. Focus on companies actively refinancing debt and extending maturities as a quality signal.
• •Agency Mortgage Opportunity: Franklin Income shifted meaningfully from investment-grade corporate bonds into agency mortgage-backed securities in 2025 after corporate spreads tightened near historical lows while mortgage spreads had widened. Agency MBS offers government-backed credit quality with spread compensation. Potential Fannie/Freddie policy changes involving an additional $200 billion in monthly purchases could further compress mortgage spreads, making current positioning a timely tactical allocation.
• •Convertibles as Income-Equity Bridge: Convertible securities allow income-focused portfolios to access non-dividend-paying mega-cap companies like Amazon, Microsoft, and Meta by blending a 2-3% equity dividend yield up to a more attractive income level while retaining upside participation. This expands the investable universe beyond the roughly 60% of S&P 500 companies that pay meaningful dividends, solving the structural problem of income generation in a growth-dominated equity market.
• •Volatility as Rebalancing Signal: When the VIX returns to pre-shock lows — as it did in mid-2025 after tariff volatility — Perks treats low implied volatility as a signal for caution rather than complacency. Maintaining portfolio liquidity specifically to deploy capital during volatility spikes, rather than moving to cash, is the core tactical mechanism. The April 2025 tariff selloff and subsequent pause represented a textbook example of this offense-during-volatility approach.
• •Passive Flow Distortion Creates Selection Opportunity: The flood of capital into market-cap-weighted passive index funds has widened the performance gap between S&P 500 market-cap and equal-weight indices by nearly double since 2023. This mechanical flow creates mispricings in mid-cap industrials, utilities, energy, materials, and healthcare stocks that passive money underweights. Active security selection in these overlooked sectors, particularly companies benefiting from near-shoring and manufacturing investment themes, offers a structural edge.