Stocks in the mid-cap space can offer some compelling returns for investors willing to look further down the market capitalisation scale, according to Franklin Templeton’s Paul Spencer.
Spencer, who is lead manager of the £1bn Franklin UK Mid Cap fund, said the FTSE 250 has become an increasingly important constituent of the FTSE All Share index in recent years, due to the strong performance of mid-cap stocks.
Indeed, year-to-date the FTSE 250 index has significantly outperformed the large-cap FTSE 100, returning 13.74 per cent against the latter’s 7.54 per cent gain, as the below chart shows.
Performance of FTSE 250 vs FTSE 100 YTD
Source: FE Analytics
The manager said: “When I took the fund over, the [FTSE] 250’s part of the [FTSE] All Share was about 12 per cent and it’s now about 17 per cent.
“If you only have 17 per cent in the 250 then you’re underweight a part of the market that has performed incredibly well over the past decade."
More recently some UK investors have become concerned by the exposure of mid-cap stocks to the domestic economy, particularly in the wake of last year’s referendum result to leave the EU.
After the Brexit result, the mid-cap index plummeted 13.65 per cent as many feared the domestic nature of the stocks would be impacted by the fall in sterling.
However, the FE Alpha Manager said investors who take such a stance might be missing out on some good investment opportunities, as shown by the rebound this year.
Spencer said: “As a space I don’t think mid cap is particularly well understood by the investment community, they still tend to consider it as being very domestic, very cyclical.”
He said the split among the FTSE 250 index tends to be around 50/50 of those deriving their income from the UK and those whose earnings come mainly from overseas, which compares favourably with the FTSE 100. 
However, Spencer (pictured) said investors may be missing out if they only consider stocks with less exposure to the UK domestic market, not because he believes the environment might change, but from a valuation perspective.
“There comes a point where you’ve been offered a really interesting valuation proposition and now is the time to take the view that these stocks aren’t being properly represented by the market share price,” he explained.
“You’re here to make money and we think on a long-term view we can make money by [having] one or two of these in the portfolio and sitting and waiting for valuations to come to us again.”
The manager said overseas operating profit exposure in the portfolio was currently at around 65 per cent.
Spencer said he repositioned the portfolio at the end of last year and had become more bullish on UK property-related stocks.
Indeed, Spencer said one recent addition to the portfolio was Ibstock, the UK’s largest brickmaker.
“[Chancellor] Philip Hammond said he was planning on building 300,000 houses per year, but we’re currently building about 175,000 per year and it’s ludicrous to imagine that we have the actual capacity in the UK to build 300,000 in the UK,” said Spencer.
“Equally, if we’re anywhere near towards building 300,000 houses, then the UK’s largest brickmaker might conceivably be in a strong position.”
He said that current demand for bricks in the UK is around 2.3 billion, while production was in the region of 1.8 billion leading to a shortfall of 400 million, currently filled by imports. Any increase in the number of homes built would have a positive impact for the brickmaket.
Elsewhere, he has also started to add to real estate exposure in the portfolio including property investor and developer Derwent London, and includes a number of London office properties.
He said there had been continued demand for London office space and the company has recently been trading at a near 30 per cent discount.
A third way that he has played the property theme in the portfolio is through Just Group, a financial services company focused on retirement income.
As well as providing a range of pension services, the firm also provides equity release in homes for people at retirement age.
Since taking on management of the fund in February 2006, the fund has risen by 329.54 per cent compared with a 212.14 per cent rise in the benchmark.
“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,” noted analysts at Square Mile Research.
The fund is up by 22.86 per cent in 2017 to 29 November, compared with a 13.74 per cent rise in the FTSE 250 ex Investment Trusts benchmark, as the below chart shows.
Performance of fund vs benchmark YTD
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.82 per cent.