In the third quarter of 2025, the Franklin Rising Dividends SMA (gross of fees) experienced an underperformance compared to its benchmark, the S&P 500 Index. This trend persisted even when considering a net-of-fee basis. Oracle, an enterprise cloud software provider, emerged as the leading positive contributor to the strategy's results. The overarching market sentiment was positive for US equities, influenced by increased clarity regarding tariff policies, a reduction in trade tensions, and the anticipation of interest rate reductions. Furthermore, the sustained strength in artificial intelligence (AI)-driven sectors played a crucial role in shaping market dynamics during this period.
During the third quarter of 2025, the US equity markets demonstrated robust growth. This upward trend was significantly supported by several key factors. First, greater clarity on tariff policies and a noticeable easing of global trade tensions provided a stable environment for businesses. Second, market participants began to anticipate potential interest rate cuts, which typically stimulate economic activity and corporate earnings. Finally, the relentless growth and innovation within artificial intelligence (AI) sectors continued to drive substantial investor interest and capital allocation, contributing to the overall market strength. This combination of factors created a dynamic backdrop against which various investment strategies were evaluated.
Despite the broader market's positive momentum, the Franklin Rising Dividends SMA faced specific challenges. A notable factor in its underperformance was the strategy's lack of exposure to high-performing stocks such as NVIDIA (NVDA) and Alphabet (GOOGL). These companies did not meet the dividend screening criteria of the strategy, and their significant appreciation during the quarter contributed to more than half of the portfolio's relative underperformance. This highlights a common dilemma in specialized investment strategies: adherence to specific criteria can sometimes lead to missing out on rapid growth opportunities in other market segments, even if those segments are thriving.
Looking ahead, the Franklin Rising Dividends SMA remains optimistic about the dividend trends observed within its portfolio companies. These companies have consistently increased their dividends at a faster pace than the broader market. This focus on dividend growth is a cornerstone of the strategy, aiming to provide stable returns and potential income for investors. Despite broader economic uncertainties, including potential softening of earnings estimates across the market, recent company announcements suggest that this favorable dividend growth trajectory is likely to continue, reinforcing the strategy's long-term investment philosophy.
In summary, while the Franklin Rising Dividends SMA did not match the S&P 500's performance in Q3 2025, primarily due to its selective investment criteria and the absence of certain high-growth stocks, its core focus on companies with strong dividend growth remains a key strength. The strategy's long-term outlook is buoyed by the consistent outperformance of its portfolio companies in terms of dividend increases, suggesting resilience even in potentially volatile market conditions.
