Thursday, October 1, 2009

Franklin Templeton Limited Duration Fund's Shareholder Meeting (2009)

I attended Franklin Templeton Limited Duration Income Trust’s (FTF) annual shareholder meeting on September 24, 2009. This meeting was held by the specific fund, not Franklin Templeton (BEN) itself.

I was the only shareholder attending. No refreshments were available. There was no prepared informal presentation.

Four other persons, all from the mutual fund, attended the meeting. Glenn Voyles (Portfolio Manager); Helen Dong (Inspector of Elections); VP Karen Skidmore; and Sr. Corporate Counsel Jason Venner. I was most impressed with Mr. Venner. After the meeting’s formal portion concluded, I asked several questions.

Some background is necessary before explaining my first question. FTF is a closed-end mutual fund. Such funds typically trade at either discounts or premiums due to several factors, including potential liquidity issues. More specifically, unlike open-ended mutual funds, buyers may only purchase shares from existing owners. I asked about FTF’s approximately 8% discount to its net asset value (NAV). I also asked whether FTF’s approximately 20% Fannie Mae and Freddie Mac bond holdings might be the reason for the discount.

Mr. Voyles said there was “no fundamental reason for” the discount. He said during the last fiscal year, there were “more sellers than buyers,” meaning the fund's price was affected by supply/demand issues. He did not believe Fannie Mae and Freddie Mac had anything to do with the discount. He indicated he did not believe the fund would reduce its exposure to Fannie Mae or Freddie Mac.

Mr. Voyles also talked about “mortgage dollar rolls.” I’ve never encountered this term before. According to FTF’s 10K, page 30, mortgage dollar rolls are “agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date...The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.” Did you get that? I didn’t, so I asked what they were.

Mr. Voyles said that these rolls were a form of leverage. He said that before investing in these rolls, the Fund’s leverage was in the form of auction rate preferred shares. He explained that the rolls were a form of leverage backed by mortgage-backed securities and increased the fund’s liquidity. However, he also said he could not tell me exactly how it works because he was involved in a different research department. (Mr. Voyles is on the high yield bond team, not the mortgage or leveraged loan team.) Mr. Venner was kind enough to show me the exact page in the 10K that defined the term.

When I asked about the auction rate securities (ARS) market, Mr. Voyles said Franklin Templeton was not experiencing any problems. The problem, he said, was that the secondary market (for ARS) has frozen.

Interestingly enough, Mr. Voyles said the “use of leverage has helped returns” by approximately 5 to 6 percentage points (from June 2008 to June 2009). FTF currently holds approximately 100 million dollars in ARS, down from 190 million dollars.

At this point, VP Karen Skidmore seemed concerned I was asking so many questions and told me I could ask only one more question.

I asked why anyone should choose Franklin Templeton over Vanguard or another investment firm. Mr. Voyles said that FTF had a large, experienced team, and its “fundamental research” was outstanding.

I don’t think FTF was prepared to have shareholders attend their annual meeting. I was pleased FTF’s senior counsel was able to show me the definition of mortgage dollar rolls, but I was concerned that even after the meeting, I still didn’t understand how FTF was using mortgage dollar rolls as leverage. My investor "spidey-sense" started going off when no one seemed to be able to explain exactly what the heck these things were.

Investors interested in preferred shares ETFs may also consider PGF, PFF, or PSK, but these investments seem heavily supported by financial companies. In addition, it is unclear whether these ETFs have been paying out dividends consistently.

Overall, I wish FTF was more prepared for its annual meeting. Other than Mr. Venner, I was unimpressed with everyone else at the meeting.

Disclosures: I own an insignificant number of FTF shares. I sent this article to FTF's corporate counsel prior to publication but did not hear back from him.


Unknown said...

At this point, VP Karen Skidmore seemed concerned I was asking so many questions and told me I could ask only one more question.
What was her rationale for limiting the only shareholder to one more question?
What do you think now that freddie and fannie are near demise as well as the mbs market?
I don't think I would invest in ftf.
Thanks for your efforts here.

Matt Rafat said...

@lee: I don't know if I would judge a fund based on a single shareholder day, but thank you for posting your comment.

By mentioning Fannie and Freddie, you reminded me that I still don't really understand mortgage dollar rolls. Even after reading more on the topic, I am still lost. I wonder if we will be seeing more about mortgage dollar rolls in the next finance scandal/bust.