‘The raison d'etre of these funds is we want to take risk,’ says Michael Greenberg
While core equity funds occupy a peculiar middle ground in institutional portfolios, they’re neither the cheap simplicity of passive nor the high-octane ambition of concentrated active strategies. But it’s that positioning that makes them essential, according to Franklin Templeton’s Michael Greenberg.
He frames equity building blocks as a continuum. At one end sit passive vehicles, aimed to replicate beta to get exposures to certain markets. At the other end are high active share and alternative managers that are willing to depart significantly from the benchmark to try to generate outsized returns.
Core funds sit in the middle of that spectrum. They accept a measured amount of tracking error - often around 1.5 per cent to 3 per cent - and look somewhat different from the benchmark, but within strict limits on country and sector bets.
In his view, this middle ground is an efficient way to construct equity exposure.
“When you put all those together, in our view, it's a really efficient way to build exposures,” said Greenberg, head of Americas, portfolio management at Franklin Templeton.
“Passive vehicles will allow you to keep up in narrow markets. But what they don't do a great job in is if there's any sort of market change and leadership, Or, if you're really trying to get some sort of a desired characteristic in your portfolio, maybe you really value downside protection or you really want to have more of a small cap because you think that's where there's alpha potential,” Greenberg added.
He argues that this structure improves the predictability of returns. While active managers can swing between sharp underperformance and strong outperformance over a cycle, “having a bit of a core ballast in [the] portfolio just helps control some of that active risk,” he said. “It’s a cost-effective way to get market beta but also have some alpha potential.”
While Greenberg acknowledged that the appropriate size of a core equity allocation depends on the investor’s philosophy, he believes it plays a foundational role in institutional portfolios.He sees core equity making up roughly a third to more than half of the overall portfolio, acting as the main stabilizing element within equities.
He underscored that investors who care most about closely tracking a benchmark will lean more heavily on passive and core strategies. Contrastingly, investors who believe they have strong active managers or compelling alternative opportunities, and who have more room in their fee budgets, will tilt more toward higher‑fee, alpha‑seeking strategies.
Still, the central problem he is trying to solve is how to pay for active management sensibly. He rejects a fully passive approach because markets don’t stand still. Consequently, he’s also focused on paying only where he sees a realistic chance of added value. He believes core funds are a practical way to spend a bit more than passive fees in exchange for controlled excess return potential.
He also emphasizes that a disciplined use of core equity improves the profile of relative returns. Concentrated active managers can swing hard versus the benchmark, both positively and negatively. A substantial core allocation helps contain that volatility in relative performance, making return patterns more predictable and ensuring that when the portfolio outperforms or underperforms, the drivers are understood and deliberate rather than accidental.
Yet, Greenberg stressed that institutional investors need to get their strategic asset allocation right before they worry about implementation. He frames the implementation phase as a combination of desired portfolio characteristics and strict fee discipline. Investment committees need to decide whether they simply want to track a benchmark like the S&P 500, try to outperform it, or embed features such as downside protection or low volatility into that US equity sleeve.
Only after those aims are clear does it make sense to decide how much goes into passive, core and higher‑cost active or alternative managers, he said.
Additionally, he emphasized that fees need to be managed with the same rigor as risk.
“Much like a risk budget where you're allocating risk to different part of the portfolio in the hopes of excess return, you're going to spend money, you're going to spend fees to get something in return,” he said. “Having a real smart, thoughtful fee budget exercise is important.”
For purely passive exposure, he argues cost should be driven as low as possible because “there's no alpha there. There's no excess return,” he noted, adding the trade-off is that full reliance on passive removes any chance of outperformance.
If done well, he believes this can “create some synergies around potential for outperformance for consistency and predictability of returns but also doing so in a way that is a reasonable price or you feel like they're getting good value for the money,” he said.
Core fund factors
Greenberg acknowledged that while every core or systematic equity fund can choose different factors, his team has spent a lot of time testing both individual factors and how they behave together. They lean on traditional signals like quality, value and sentiment because each has added value over time, but at different stages of the cycle.
On top of the traditional set, they add an “alternative” factor that is specific to their platform. Here the team uses back testing, AI and tools like large language models to search for additional, uncorrelated signals and to guard against alpha decay, where once-successful factors get crowded and lose effectiveness. One example he highlighted is short interest, where “looking at short interest on certain stocks tends to give an interesting signal,” he noted.
The final piece is a conviction factor built from Franklin Templeton’s own active managers. The idea is to quantitatively harvest the stock picking abilities of all of the underlying managers within the firm by examining where those managers are meaningfully overweight or underweight versus benchmarks and turning that pattern into a systematic input.
When the five factors - quality, value, sentiment, alternative and conviction - are combined and optimized in a portfolio, they are intended to be the deliberate sources of active risk, explained Greenberg.
“We've basically eliminated exposure to factors where we don't want to have an active bet. That can be certain sector exposures, size, other style region or country. We don't want that to be something that's going to drive relative outperformance or under performance because it's not something we feel in these portfolios that we want to have. We really want to have a portfolio of stocks that have certain active and deliberate bets,” noted Greenberg. “The raison d'etre of these funds is we want to take risk but in a precise and deliberate way.”
