FTF Martin Currie UK Mid Cap: August 2023 update

How it fits in a portfolio

FTF Martin Currie UK Mid Cap aims to deliver income and capital growth over the longer term. The managers invest in medium-sized companies within the FTSE 250, often considered the ‘sweet spot’ between company growth potential and maturity. It’s home to some great domestic companies and also those that do business internationally. This fund could be a useful option as part of the UK portion of an adventurous portfolio or work well alongside funds investing in large or higher-risk smaller UK businesses to achieve broader UK stock market exposure.

Manager

Richard Bullas has been co-manager of the FTF Martin Currie UK Mid Cap fund since 2013 and took over as lead manager of the fund in July 2020. He began his career working in accountancy audit before moving to Aviva as an analyst. He joined Rensburg Fund Management, which later became Franklin Templeton Fund Management, in 2000. Bullas became a fund manager in 2006 and has covered the UK smaller companies’ sector for most of that time.

Bullas is also involved in the FTF Martin Currie UK Smaller Companies and FTF Martin Currie UK Managers Focus funds. There are some similarities between these funds, and we think he’s able to comfortably manage his commitment to each portfolio.

Bullas has the support of a strong team at Martin Currie, and they collectively have a lot of experience. We believe the fund is in good hands under Bullas. He has a strong track record investing in smaller companies, and we believe investing in medium-sized companies is a natural and achievable extension of his abilities.

Process

Bullas and his team hunt for businesses with strong growth potential. Their process centres around two key pillars – quality and valuation. This sets a high bar for companies to make it into the fund and aims to mitigate three key risks: business, financial and management.

In terms of quality, the team looks for companies whose earnings are sustainable over the long run, such as those with brand power and hard-to-replicate advantages. Management teams are essential to a company’s success so they must have a strong track record of delivery and be incentivised appropriately. These companies also need to be financially robust, so they look for companies that are highly cash generative and avoid those with lots of debt.

Once the team has evaluated a company’s quality, they assess how attractively it’s valued. As long-term investors they want to understand the stock’s upside and downside potential. The team typically forecast the potential share price returns over the next three to five years. If the share price is attractive enough to benefit from these returns, they will invest.

This fund invests in a relatively small number of companies, typically between 30-50. There are currently 31 stocks owned in the fund. This means each one has the potential to make a meaningful difference to performance, both positively and negatively, which can increase risk. Companies are sold if they graduate into the larger FTSE 100 by growing in value. While the fund mostly invests in medium-sized companies, Bullas can also invest in smaller companies within the index, which also adds risk. The managers have the flexibility to invest up to 20% of the fund overseas, although they’re currently investing the fund solely in UK listed businesses.

Earlier this year, Bullas sold the fund’s position in footwear company Dr Martens following an operational problem at a key distribution centre in the US which disrupted order fulfilment. This knocked his confidence in the company’s management and given an uncertain outlook, this was enough to trigger a sale.

Culture

Bullas and the team are based in Leeds. They have a collegiate culture, with lots of collaboration and support for each other. The team is part of Martin Currie, an asset manager within the wider Franklin Templeton group, so they enjoy the resources that come with being part of a large organisation. The Leeds office operates like a boutique fund group though, as the managers are given the freedom to invest largely without interference.

ESG integration

Franklin Templeton was previously a laggard on ESG integration. But since its integration with Martin Currie (as part of the broader Legg Mason acquisition), the group has made significant strides forward, in part because of its ability to leverage Martin Currie’s expertise. Responsibility for carrying out ESG analysis sits with individual analysts and portfolio managers, and all stock research must consider the material and relevant governance, social and environmental factors that could impact a company’s ability to generate sustainable returns.

The firm offers a range of strategies that take a more hands-on approach to ESG, thematic investing and impact. All investment teams have access to a dedicated Global Sustainability Strategy team, which tracks emerging themes, shares industry best practice and conducts independent analysis. There is a firm-wide commitment to avoid controversial weapons.

Franklin Templeton fund managers and analysts engage with executives and board members of the organisations they invest in to review issues they believe are material to the firms’ long-term prospects. They also vote at shareholder meetings wherever possible, informed by three third-party voting advisors. The firm publishes regular ESG-focused articles and a comprehensive annual stewardship report. It also outlines its voting activity on a fund-by-fund basis, although voting rationale is not available.

Cost

The fund usually has an annual ongoing charge of 0.82%, but with a 0.20% saving it’s available to HL clients for 0.62%. The HL platform charge of up to 0.45% a year also applies.

Performance

The fund has performed well since Bullas became co-manager of the fund in September 2013. From then until the end of July 2023, the fund has delivered returns of 74.32%*, compared with 62.84% for the FTSE 250 ex Investment Trust index. Past performance isn't a guide to the future.

Over the last 12 months the fund hasn’t fared as well. It’s returned -2.02% to investors, falling by more than the FTSE 250 ex Investment Trust index, which fell by 1.04%.

Our analysis suggests that over this period, telecommunications business Spirent Communications and Liontrust Asset Management have been among the key detractors from performance. During the year, Spirent saw a lengthening of the sales cycle for their products due to increased caution among their customer base given the uncertain economic outlook, resulting in reduced growth and profit forecasts in the short term. And Liontrust’s share price suffered during the period as investors reacted to the proposed, and now failed acquisition of GAM holdings.

Bullas is optimistic about returns from here and believes that many of the businesses the fund invests in are emerging from recent volatility in a stronger competitive position and are trading at attractive valuations.

We expect the fund to perform better than the index in a rising market, but to fall further during downturns. We think Bullas has the experience, skill and team support to deliver good long-term returns to patient investors, although there are no guarantees.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2023.

More about FTF Martin Currie UK Mid Cap, including charges

FTF Martin Currie UK Mid Cap Key Investor Information