By Donald G. Huber, CFA*, Vice President, Portfolio Manager, Franklin Equity Group.

As dedicated long-term investors with an average holding period of three to five years, we believe our success relies on making sure we have invested in the right companies, rather than on making the right call concerning financial markets or the economy. Consequently, despite the recent upswing in market volatility, our strategy has continued to focus on each company's growth, quality and valuation when choosing potential investments.

Choosing strong companies with potential for growth over a three- to five-year period is our primary objective. Consequently, we look for companies that generate strong cash flows and that have a management team who have historically invested that cash to generate additional value. We believe that such companies are likely to prosper in good times and be well situated to potentially withstand an economic downturn better than peers who do not share the same financial strength.

Given that we look for companies with sustainable business models and high growth potential, we tend to lean toward focused firms with one to three business lines, as well as those earlier in their growth cycle. For that reason, within the health care sector, we have generally avoided major pharmaceutical firms and instead have primarily looked at those firms that specialize in biotechnology and medical devices, which we believe have more focused business models and product sets that could potentially offer attractive growth.

Our current focus on health care may mislead some investors to think that we are bullish on this sector. Actually, the reason is that we have found a number of businesses that meet our growth, quality and valuation criteria and are diversified in their core businesses, helping us the manage and limit the overlap among investments. Whereas large-cap pharmaceutical companies generally dominate the sector, we tend to look at smaller non-pharmaceutical companies.

Nonetheless, we also find certain large-cap stocks attractive, preferring to invest in those companies with clean business models and avoid conglomerates in which the drivers of growth are less easily defined. For instance, within the energy sector, we have been focusing on services and technology companies that support the production of oil and natural gas. We believe these companies offer a long-term growth opportunity supported by competitive advantages, including intellectual property, pricing power and the increased sophistication required for extraction.

Furthermore, the growth in Internet retailing has caught our attention, and though we do not believe all Internet businesses are great businesses, a common factor in the companies we gravitate toward is that they are generally cash-generative businesses, have a meaningful or dominant market share and are, therefore, in a very strong competitive position that we believe is sustainable.

Within our strategy, we utilize a contrarian rebalancing approach that supports selling on stock price strength and buying on stock price weakness. For example, a particular stock may decline on general market weakness, without any developments suggesting a significant change in the fundamentals of the company - a common occurrence in unstable economic environments.

Given our philosophy, we would approach a situation like this as an opportunity to rebalance the position. The Franklin Global Large Cap team within the Franklin Equity Group focuses on in-depth research for every holding, often enabling the team to retain confidence in a company despite short-term market sentiment.

As we look toward the remainder of 2011, we believe markets are likely to remain somewhat challenged given the number of outstanding issues that continue to need to be addressed. We acknowledge as well that many investors remain nervous, a sentiment that could potentially hold markets back in the near term. As always, we remain focused on company fundamentals, looking for sustainable business models supported by strong free cash flow and responsible management.

*CFA and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.