It is now more important than ever for UK investors to find managers with a bottom-up stock selection process, according to Franklin Templeton’s Colin Morton (pictured), who says a number of headwinds are making easy progress less likely. 
The lead manager of the Franklin UK Equity Income fund believes the lacklustre growth the UK economy is experiencing means investors can no longer rely on market performance to carry their returns, and instead need to drill down into stock-specific factors.
He adds that the reason so many people have been bullish on the UK over the past few months is because they are riding on the overhang of May’s general election, when a Conservative majority government came into power.
“It was obviously good news on a short-term basis but what’s interesting is that the market is drifting back to where it was – it’s only been a couple of months and we’re back where we were,” the fund manager said.
Performance of index in 2015
Source: FE Analytics
“The reality is, elections are interesting and obviously they have some bearing on micro policies and what the country is going to do but, generally speaking, the challenges that are facing the UK are much bigger than the election itself.”
“The reality is that the UK economy still continues to struggle. Yes it’s growing more than it was and things have improved since the crisis, but we’re still looking at an economy that, nowadays, grows a couple of per cent – 2 per cent or 2.5 per cent rather than the old days of 3 or 3.5 per cent.”
Morton believes there are a number of reasons for the growth slowdown, including a market sell-off and slow growth in China, the ongoing Greek debt crisis and difficulties across various emerging market regions.
Not only this, he says that the extreme levels of debt the UK has racked up have led to the economy’s growth struggle and will continue to provide a market headwind in the near future.
“The current forecast for the UK economy in two years’ time is the household debt-to-income ratio will be back at pre-crisis levels. We’re going to have a debt-to-income ratio of round about 160 per cent. There’s still an awful lot of debt out there. People have got mortgage debts, credit card debts are just starting to tick back up, consumer debt is starting to rise, this economy is still very indebted,” he explained.
“The government debt situation as we speak is above £1.5trn – it’s always an interesting debate, how the government phrases things. I think the public doesn’t quite understand the difference between how much we actually owe and what the annual deficit is. George Osbourne stands up and says, ‘we’ve halved the debt’ and everyone thinks that sounds really good. But what that means is rather than spend £170bn more than we’ve got, we now spend about £85bn more than we’ve got.”
While this is of course a step in the right direction, the manager warns that national debt actually increased from £900bn to £1.5trn under the Conservative-Lib Dem coalition, which is the largest increase in debt in the history of the UK government.
“Economically, we think it’s going to be a battle. The UK economy has this big scar from the time of the crisis and we really need to rebalance the UK economy away from areas such as housing and services,” he warned.
According to Morton, the government’s focus on the housing market and introduction of schemes such as ‘Help to Buy’ were partially brought in to improve the economy and partially to win votes. he adds that the positive responses this received demonstrates the UK economy’s dependence on housing and services.
“Around 80 per cent of the UK economy is services and housing related, which is the same level we were at pre-crisis, so there has been very little change from that perspective,” he said.
“We think the UK economy is going to be unspectacular. It will be steady, but there are still lots of risks out there. Ultimately things are better than they were so we’ll see what happens.”
“Europe is still an issue and Greece seems to have been put on the back-burner again – if you look at the situation there, they’re currently paying towards debt-to-GDP of over 200 per cent. It’s very hard to see a scenario where Greece will ever be able to pay that money back. It feels like the can has been kicked down the road by authorities because obviously it’s very politically motivated.”
Fears arose earlier this year that, if the Greek government were to be cut an attractive deal by its creditors, other indebted countries such as Spain and Portugal would threaten to leave the eurozone in an attempt to receive similar treatment.
As such, many investors worry that the uncertainty over whether Greece will leave the eurozone is just the tip of the iceberg, and expect other countries to potentially follow suit. Given the eurozone is the UK largest trading partner, this creates obvious uncertainty for the economy.
“I think it’s important not to expect too much help from the economy as a whole,” Morton concluded.
“What does that mean for the market? For us, it’s all about finding new companies and stocks. The market as a whole is probably going to continue not to give a lot. I think it really is about stock-picking in this market - it’s about trying to find companies that have decent stories, whether it’s self-help stories or companies who have got growth potential.”
One of the ways Franklin Templeton is aiming to do this is through their Franklin UK Managers’ Focus fund, which is equally-weighted and consists of 10 ‘best ideas’ stocks from four UK fund managers.
Morton selects large-cap and equity income stocks, Ben Russon picks multi-cap stocks and FE Alpha Manager Paul Spencer focuses on mid-cap stocks. Richard Bullas can select up to 20 small-cap stocks, which amounts to a 25 per cent weighting of the portfolio.
Launched in 2006, the £126m fund has been in the top-decile over one, three and five years, as well as over three and six months
Over five years, the fund has returned 114.72 per cent, doubling the performance of its FTSE All Share benchmark and outperforming its average peer in the IA UK All Companies sector by 50.17 percentage points.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Franklin UK Managers’ Focus has a clean ongoing charges figure (OCF) of 0.85 per cent.
