Franklin Rising Dividends SMA: Navigating Volatility with Long-Term Resilience in Q1 2025

The Franklin Rising Dividends SMA faced headwinds in the first quarter of 2025, posting a -1.28% return for both the quarter and year-to-date period. However, its longer-term track record shines through: the strategy delivered 2.43% over 12 months, 5.86% annualized over three years, and a robust 16% since its 2015 inception. This resilience underscores the fund’s focus on small- to mid-cap equities—a niche it navigates with disciplined research and valuation flexibility.

Performance in Context: Short-Term Challenges, Long-Term Strength

The Q1 stumble aligns with broader market volatility, particularly in smaller-cap equities, which often face heightened sensitivity to interest rate shifts and economic uncertainty. Yet the fund’s 5-year annualized return of 16% outpaces the Russell 2500 index’s historical average, suggesting a consistent edge in stock selection.

Strategic Insights: A Flexible, Research-Driven Approach

Franklin’s strategy emphasizes a small- to mid-cap equity focus, with 75% of holdings anchored in the Russell 2500. This range offers diversification beyond large-cap dominance while avoiding the higher volatility of pure small-cap exposure. The team’s valuation-agnostic methodology—spanning value, core, and growth sectors—allows opportunistic shifts in a dynamic market.

Key pillars of the strategy include:
1. Process: A repeatable, risk-adjusted framework for security selection and portfolio construction.
2. People: A seasoned team with over five years of audited outperformance.
3. Parent: Franklin Financial’s robust balance sheet (up 12% in assets to $2.26 billion in Q1 2025) and shareholder-friendly policies, such as a 3.1% dividend hike and a $150k share repurchase plan, bolster investor confidence.

The Parent’s Role: Strength in Banking, Strength in Funds

Franklin Financial Services Corporation (NASDAQ: FRAF) reported 16.7% net income growth in Q1, driven by a 15% rise in net loans and 20% deposit growth. Its net interest margin expanded to 3.05%, while the cost of deposits remained manageable at 2.02%.

This financial health is critical, as the parent’s stability underpins the SMA’s credibility. CEO Craig Best, stepping into leadership post-Tim Henry’s retirement, inherits a well-capitalized platform, with book value per share up 10.6% year-over-year to $33.99.

Risks and Considerations

The Q1 dip highlights the inherent risks of small-cap exposure, particularly in a rising rate environment. The fund’s modest short-term performance also reflects broader sector underperformance. However, Franklin’s focus on diversified mid-cap opportunities—such as commercial real estate-linked loans and stable wealth management fees—mitigates concentrated risk.

Conclusion: A Fund Built for Cycles, Not Moments

Franklin Rising Dividends SMA isn’t designed for quarter-to-quarter fireworks. Its -1.28% short-term return is overshadowed by a 11.29% since-inception annualized return and a strategy refined over five years. With Franklin Financial’s balance sheet as a backstop and a team that has outperformed peers across market cycles, this SMA offers investors a disciplined path to growth in an asset class that often rewards patience.

For those seeking small- to mid-cap exposure without small-cap risk, Franklin Rising Dividends remains a compelling choice—one backed by data, not just dividends.