- Paul Spencer believes many UK-centric medium-sized companies are attractively valued
- He has therefore rotated the portfolio towards this area
- We believe the fund remains an excellent option for pure exposure to some of the UK's best medium-sized businesses
Finding medium-sized businesses destined to be the market giants of tomorrow is no easy task. This is why we feel investors should employ the skills of an experienced fund manager. We think Paul Spencer, manager of the Franklin UK Mid Cap Fund, fits the bill.
He has successfully invested in companies with outstanding prospects for more than two decades and benefits from the backing of an experienced UK equity team at Franklin. They invest in a small number of attractively-valued companies, which are run by shareholder-friendly management teams and in good financial health. The concentrated nature of the portfolio, and the fact the manager has the freedom to invest in smaller companies, adds risk.
We believe an experienced manager implementing a proven investment process is a strong combination. This fund is an excellent choice for exposure to medium-sized UK companies and we expect it to perform well over the longer term, although there are no guarantees. The fund retains its place on the Wealth 150+ list of our favourite funds in the major sectors with low charges.
Where is the manager finding value?
Paul Spencer believes companies that earn money overseas have become particularly sought after by other investors, and this has inflated their share prices to unsustainable levels. On the other hand, many companies that earn most of their profits in the UK, and whose prospects are intertwined with the UK economy, have been overlooked so their share prices are modestly valued, in his view.
Many of these companies face challenges they will struggle to overcome. However, some have been unfairly overlooked by other investors and could perform well when they return to favour, in the manager’s view.
He has therefore rotated the portfolio towards UK-centric companies that he believes are capable of turning around their fortunes. This involved selling international earners, such as aerospace products manufacturer Ultra Electronics, from the portfolio. Meanwhile, an investment was made in UK engineering business Weir Group.
How has the fund performed?
The fund has performed well over both the short and long term. Over the past year, it outperformed the broader medium-sized companies market by 11%*, though past performance should not be seen as a guide to the future. Our analysis attributes this to the manager’s ability to select companies with outstanding prospects, and avoid weaker-performing businesses.
|Annual percentage growth|
| Jan 2013 -
| Jan 2014 -
| Jan 2015 -
| Jan 2016 -
| Jan 2017 -
|Franklin UK Mid Cap||29.1%||3.2%||5.8%||8.5%||25.8%|
|FTSE 250 (excluding Investment Trusts)||26.1%||5.9%||4.5%||11.5%||14.8%|
Past performance is not a guide to the future. Source: Lipper IM* to 31/01/2018
Performance was boosted when two of the fund’s investments received takeover offers from competitors, and their share prices subsequently rallied. An investment in linen rental business Berendsen was taken over by French rival Elis, while events and publishing company Informa made a bid for smaller competitor UBM in January 2018.
Paul Spencer points out that the number of mergers and acquisitions taking place is still significantly lower than before the financial crisis. He believes there is scope for takeover activity to become increasingly frequent in future, and this could benefit share prices and investors.