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Franklin Templeton’s Spencer on its three themes for UK mid caps

31 July 2017

Paul Spencer, lead manager of Franklin UK Mid Cap, reveals which parts of the UK mid-cap space it is targeting against a more challenging investment backdrop.

By Rob Langston,

News editor, FE Trustnet

FE Alpha Manager Paul Spencer (pictured) is concentrating on the UK housing shortage, ageing population and firms with a global influence for returns against an increasingly challenging investment backdrop.

The lead manager of the £943.3m Franklin UK Mid Cap fund said events over the past year such as the EU referendum and the election of Donald Trump as US president have created a challenging investment environment.

He said: “Geopolitical surprises over the last year or so have highlighted the pitfalls for investors who try to predict the future.

“While crystal ball gazing is not how we like to manage our portfolios, we strive to ensure we have a robust enough investment discipline to cope with so-called ‘black-swan’ events.”

The fund has returned 42.82 per cent over three years, compares with a 37.42 per cent rise in the benchmark FTSE 250 index.

It has also outperformed its average peer in the IA UK All Companies sector, which returned 27.14 per cent over the same period. However, many of the funds in the sector have a wider remit investing further up the market capitalisation scale.

Performance of fund vs sector & benchmark over 3yrs

Source: FE Analytics

The FE Alpha Manager said its three key themes for the UK mid cap space reflected where the team see opportunities to benefit from developments in the domestic and international markets.

Spencer said: “We like to base our investment strategies in the UK mid-cap space on a number of carefully thought-through assumptions on the way the local and global landscape is likely to pan out.

“In particular we’re presently focused on three themes: the UK’s housing shortage, the UK’s ageing, wealthy population and the recovery in global industrial production.”

Below, FE Trustnet explores the three themes highlighted by Spencer.


UK housing shortage

The first theme highlighted by Spencer is the UK housing shortage. According to the Office for National Statistics (ONS), UK house prices have risen by almost 30 per cent during the past five years, responding strongly after the financial crisis of 2008.

Rise in house prices over 10yrs

Source: FE Analytics

However, housing stock has fallen since the crisis and new stock has been slow to enter the marketplace.

Global real estate services provider Savills recently estimated that there was a shortfall of more than 90,000 residential consents per year where demand for housing was greatest, although the Home Builders Federation estimate that 220,000 to 250,000 homes per year are needed to meet demand.

Spencer said: “A multi-decade shortfall in UK housing production has led to a tight demand-supply situation for new housing.

“More latterly, buoyed by the cheap availability of mortgage finance, supply of suitable land, high levels of employment and the government-assisted ‘Help to Buy’ scheme, housing production has been on an upwards path.

“And despite the political turmoil that we saw with the UK snap election and negative media reports of the impact of Brexit negotiations on housing, we expect demand to stay robust and think housebuilders and brick suppliers should benefit from this situation.”

This theme is represented in the portfolio by top holding Ibstock, a manufacturer of clay bricks and concrete building products, which represents 4.43 per cent of the portfolio. Another top holding is homebuilder Bellway which is a 3.16 per cent holding in the fund.


The silver economy

The latest report from the ONS in March this year highlighted the ageing UK population, Spencer’s second major theme.

Indeed, the percentage of the UK population aged 65 or older increased to 17.8 per cent and is projected to continue to grow, reaching 24.6 per cent of the total by 2045.

“This is an important consideration for the provision of health and social care services and pensions,” it noted.

Population pyramid for the UK, 2005 &2015

Source: ONS

The rise in the ageing population has come as life expectancy has steadily increased over the past few decades.

Girls born in 2015 can now be expected to live 82.8 years from birth, while boys can expect to live to 79.1 years.

“Improved healthcare and lifestyles, especially for those aged 65 years and over, is the main reason for the increase in life expectancy,” the ONS further noted.

Spencer added: “The UK’s ageing population forms another one of our investment themes. The percentage of people aged 65 and over is projected to grow and make up nearly a quarter of the population by 2045.

“As a result, companies in the private health care space, assisted living, home emergencies and repairs and financial services should be set to reap the benefits of this growing part of the population.”

Just Group represents one of the main plays in the portfolio for this theme. The firm, which specialises in retirement products and services, represents a 3.18 per cent holding in the fund.


Global influence

The third and final theme has centred around the recovery in global industrial production, particularly in the US, said Spencer.

“As mid-cap investors, we’re conscious that it’s not just large-cap stocks that are exposed to international earnings,” he explained.

He added: “The mid-cap market is diverse in comparison to the large-cap space, and some companies in production facilities and services with a focus on the US, could do particularly well on the back of international exposure.

“We look for well-financed mid-cap opportunities in a robust economic position. We also look for strong management teams that we judge should be able to ride out the volatility that plagues the geopolitical landscape.”

Among stocks in the fund’s top 10 holdings include heat treatment specialist Bodycote and high-performance polymer solutions company Victrex, both self-proclaimed world leaders in their fields.

 

Overall, the fund’s largest sector exposure is to industrial goods & services, representing 22.32 per cent of the fund. Significant overweights for the fund include the financial services, insurance, media, personal & household goods, and chemicals sectors.

Spencer has overseen the fund since 2006; he was joined by deputy managers Mark Hall and Richard Bullas in 2013.

"Under the control of Paul Spencer, this fund benefits from a fund manager who has considerable experience of the UK market,” noted fund ratings agency Square Mile Research.

"This is a solid proposition for investors looking for a pure FTSE 250 play run by an experienced and pragmatic investor, while the fund's emphasis on minimising capital losses should mean a less bumpy ride during volatile market conditions."

Franklin UK Mid Cap has an ongoing charges figure (OCF) of 0.82 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.