Ongoing Brexit negotiations, a weaker UK government and growing support for hard left-wing principles is making it more difficult to position as a large-cap investor, according to Franklin Templeton’s Colin Morton.
Morton, lead manager of the four FE Crown-rated Franklin UK Equity Income fund, said a greater degree of political uncertainty had made it much harder to position for all eventualities.
He said: “It’s never possible to predict what is going to happen and we all know that anyone who tells you different is talking rubbish. But you like to pretend you can forecast what is going to happen.
“It’s even difficult to pretend because the reality is that there are so many things going on from a macro point of view.”
Morton said an example of one of the bigger challenges as a large-cap investor was the ongoing Brexit negotiations and trying to understand what the outcome might be.
Performance of FTSE 100 since EU referendum
Source: FE Analytics
He said: “From an investment perspective I’m almost ignoring it because it’s very difficult to put together a portfolio based on something that may or may not happen.”
“What I’ve been banking on more is that the companies I invest in are capable of being able to adapt and change to whatever is thrown by them by not being part of the single market or the EU.”
He said he hoped that the management and the business models of every company he holds are strong enough to cope with whatever comes their way.
Indeed, Morton said while new tariffs might emerge for UK-based companies many of internationally focused large-caps operate in parts of the world where tariffs already exist and are more complicated to operate in.
“In terms of Brexit, I still suspect it won’t matter very much in five or 10 years’ time – that’s my core position,” he said, adding that he did not believe it would not affect companies in the long run.
“I’m just hoping that common sense prevails and that from a company point of view all governments realise that it’s quite sensible for countries to continue to trade and communicate with each other.”
He said another challenge had been the swing in UK politics, which had seen the Conservative Party emerge as the overall largest party but with a much weaker majority pushing it towards more populist policies being espoused by the left-wing Labour Party. 
This manifested itself in a call for UK energy prices to be capped, a measure embraced by Conservative leader Theresa May and of some concern to the utilities sector.
Morton (pictured) said: “One of the areas that has really hit me quite hard in the past six months in the income sector is utilities. I have a reasonable position in utilities, I like quite a lot of things about them. There is good dividend yield, they tend to be UK inflation protected, there are quite a few boxes ticked.”
He said the utilities sector had become more of a “political football”, which had come out of the blue.
Indeed, given the result of the general election and continued in-fighting in the Conservative Party, a new leader and a new general election could take place, increasing the likelihood of a Labour government led by Jeremy Corbyn.
Morton said a Corbyn-led government would affect the UK equity market – such as a corporation tax hike, renationalisation of some industries and scrapping student loans – which would have significant impact on sterling.
“What none of us has seen in the last 30 or 40 years is a socialist government,” he said. “For the first time we have the prospect of having a proper left-wing party in control.”
He said while some of the proposals would make life difficult for UK-focused companies, for more international large-caps there would be a limited impact.
“What we’re doing is having our foot in quite a few camps at the moment, trying to keep exposure in those really high quality large-cap names that we like and think are a natural hedge if something were to happen from a political point of view,” said Morton.
The manager has also been trying to identify the stocks that have experienced weaker performance because of Brexit, but said it wasn’t a time to be making all-in decisions either way.
“Hopefully five, 10 or 15 years down the line these events won’t matter very much, but they are significant events,” he said. “There is definitely some significant diversion from what could happen over the six, 12 or 18 months; it’s not really something had to deal with from a political point of view for a number of years”
As such the manager said he has continued to approach management of the Franklin UK Equity Income fund in the same way, focusing on taking a different view of large-cap stocks and ensuring it continues to deliver a competitive yield.
“We are trying to be that cornerstone in a client portfolio; we’re trying to produce a solid, reliable dividend yield; we’re trying to grow that dividend yield over time. And we’re trying to do that without taking huge amounts of risk,” he explained.
“We are not trying to shoot the lights out, we’re trying to be consistent in the middle of the portfolio somewhere and really cause not too many sleepless nights.”
Indeed, over 10 years the fund has a top quartile volatility score of 12.84 compared with the sector average of 14.06. Meanwhile it has also generated a top quartile Sortino ratio score (which measures risk-adjusted returns with a focus on downside volatility) relative to the IA UK Equity Income sector, demonstrating that it has been able to capture the “right” kind of volatility over the years.
The fund, which is included on the FE Invest Approved list, was launched in 1987 and is one of the sector’s oldest names. Morton has managed the fund since 1995 and was joined in 2013 by FE Alpha Manager Ben Russon and Mark Hall.
Over 10 years, the fund has returned 110.79 per cent, compared with an 88.67 per cent rise for the average IA UK Equity Income sector fund and a gain of 86.09 per cent for the benchmark FTSE All Share index.
Performance of the fund vs sector & benchmark over 3yrs
Source: FE Analytics
“Similar to a lot of income funds, the Franklin UK Equity Income fund does provide the necessary income as it says on the tin,” FE Invest analysts noted.
“However, this fund differs in that the discipline across the team to dividend yield and bottom up fundamentals leads it to appear as contrarian in comparison to its peers.”
Franklin UK Equity Income has a historic yield of 4.15 per cent and an ongoing charge figure (OCF) of 0.45 per cent, having reduced charges earlier this year.