As recent FE Trustnet research found, many of the funds that focus on managers’ best ideas have trounced their less concentrated flagship products. Haynes says that the Franklin fund is a good example of the potential in this approach.
“[The managers] have a good pedigree of managing UK equities. They can provide the best in all areas, giving you good, actively managed exposure to a broad range of UK companies,” he said.
“Two of the managers stand out for us: Colin Morton, who has a long term track record managing cautious, blue-chip stocks and Paul Spencer who has done very well in mid-caps.”
Franklin Templeton’s Leeds-based UK equities team already manage a range of market-beating UK equity portfolios – such as the four FE Crown rated Franklin UK Equity Income fund and FE Alpha Manager Paul Spencer’s Franklin UK Mid Cap fund – but investors can access the best ideas of the entire team in the tiny, overlooked Franklin UK Managers’ Focus fund.
Over the last one, three and five years, the Franklin UK Managers’ Focus fund has beaten nearly every other individual portfolio the team manages.
Given the strength of mid-cap stocks over the last several years, the Franklin UK Mid Cap fund did edge out the team portfolio over three and five years and the Franklin UK Smaller Companies fund has surged ahead over the last 12 months.
Source: FE Analytics
Colin Morton, who manages the Franklin UK Blue Chip fund, says the £45.6m Franklin UK Managers’ Focus fund combines the best ideas of the entire team into one concentrated UK equity portfolio.
“It’s the best 40 ideas across the whole of the UK team,” he said. “Since it’s the best ideas, everything is competing to be in the portfolio. It’s still only £50m, so there’s scope to get bigger. The fund has a long runway ahead of it.”
Morton argues that the fund is a better representation of the UK market because the FTSE is comprised of a large number of companies which derive their earnings from overseas, while the team are able to choose stocks which are more exposed to the recovery at home.
The fund is managed by a trio of FE Alpha Managers – Paul Spencer, Ben Russon and Mark Hall – as well as large-cap equity specialist Morton and UK smaller companies manager Richard Bullas.
The fund is an amalgamation of the best ideas from the team’s more specialised portfolios, comprising a selection of 10 of the highest conviction ideas each from the large cap, mid cap and multi-cap space, as well as up to 20 stocks from the small cap sector.
Morton says the team allow additional smaller companies ideas in the portfolio to avoid liquidity issues as smaller companies can sometimes be more difficult to trade than better-known large and mid-cap holdings.
FE Alpha Manager Hall acts as an overseer to the entire portfolio to ensure there is cohesion between the best ideas and keep the fund from tipping too heavily toward one specific sector, such as mining, says Morton.
Though the fund is unconstrained, the team do aim to outperform the FTSE All Share, which they’ve done over the last one, three and five years as well as beating their peers in the IMA UK All Companies sector over each period.
Over the last 12 months, the fund has more than trebled the returns of the FTSE and delivered returns well ahead of the sector, at 18.7 per cent.
Since launch in September 2006, the fund made 92.64 per cent, nearly doubling the returns of the sector and index over the period.
Performance of fund vs sector and index since 2006
Source: FE Analytics
Morton says the team look at five key criteria when selecting stocks to populate their portfolios.
First they look at the value of the business, then how much debt or cash it has. They then look for a pension deficit and whether the cashflow will be lower because the company has to put in extra money.
They then look at the the tax liabilities of the business and the operating profit underneath.
“It’s not just the headline numbers,” he said. “You can find companies on cheap P/E ratios which are expensive on valuation. You need to look at the free cashflow and take off any debt or tax. How much cash is left at the end of that?”
The fund is currently tipped toward industrial stocks, with nearly 25 per cent invested in the sector. Equipment rental company Ashtead Group, automotive distributor and retailer Inchcape and travel specialist Thomas Cook are all top-10 holdings.
