Franklin UK Mid Cap: August 2021 Update

• Richard Bullas has been lead manager for over a year following Paul Spencer’s retirement
• The fund’s high conviction approach centres around company quality and valuation
• Long-term performance has been strong, but the fund has lagged the recovery since March 2020
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Franklin UK Mid Cap aims to deliver income and capital growth over the longer term. The managers only 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 for 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 took over Franklin UK Mid Cap in June 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 Franklin UK Smaller Companies and Franklin 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 Franklin. We highly rate some members, such as Mark Hall, who works with Bullas on all his funds. They collectively have a lot of experience and Bullas has worked with the team for well over a decade.

We believe the fund is in good hands under Bullas who has been involved with the fund since 2013. 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 and be incentivised appropriately. These companies also need to be financially robust, so they avoid those with lots of debt.

Once the team has evaluated a company’s quality, they assess its value. As long-term investors they typically forecast the potential share price returns over 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. 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, meaning only medium-sized companies are held in the fund but Bullas can invest in smaller companies within the index, which also adds risk.

Compared to the index, the fund currently invests more in sectors like industrials, telecommunications and consumer discretionary and less than the index in travel & leisure, technology and financials. Over the past year new investments include UDG Healthcare, a provider of healthcare services. The share price in the team’s view looked attractive and Bullas believes healthcare spending is likely to remain at elevated levels following the pandemic. It’s also likely that demand for remote working and cyber security will persist. To gain exposure to this trend Bullas invested in IT solutions provider, Bytes Technology Group. Other notable purchases include Games Workshop and Watches of Switzerland.

Several companies have also recently been sold like automotive fluid company, TI Fluid Systems. Bullas felt the decline in traditional vehicles in favour of electric vehicles posed headwinds for the company. Asset management firm Jupiter was also sold following significant outflows and their acquisition of competitor, Merian. They switched into Liontrust, another asset manager where he sees better growth prospects and a higher quality business.

Culture

Bullas and the team are based in Leeds. We think that’s a good thing as they can avoid the ‘noise’ of the capital. They have a collegiate culture, with lots of collaboration and support for each other. The team is part of 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 they’re given the freedom to invest largely without interference.

Franklin Templeton have been signatories on the Principles for Responsible Investment since 2013. Whilst not a dedicated ESG fund, the managers are mindful of these considerations throughout their investment process. They’ve always assessed a company’s governance and over time they’ve become more aware on environment and social factors. This includes engaging directly with company management on material ESG topics.

Cost

The fund usually has an annual ongoing charge of 0.82%, but we’ve negotiated a 0.2% saving so it’s available to HL clients for 0.62%. This is one of the lowest charges among actively-managed UK mid cap funds. The HL platform fee of up to 0.45% per year also applies.

Performance

Performance has been strong since the fund’s launch in October 2010. During this time the fund has returned 200.8%* vs 189.1% for the FTSE 250 excluding Investment Trusts index. Our analysis suggests this has been achieved through good stock selection, although most of those returns are attributable to the fund’s previous manager Paul Spencer. Remember past performance isn't a guide to the future. Investments can fall as well as rise in value and you may not get back as much as you originally invest.

Medium-sized companies were initially some of the worst affected in the UK stock market during the lows in March 2020. Over this period the fund fell broadly in line with the index but has lagged behind during the recovery. We normally expect the fund to outperform in falling markets but given the speed and nature of the crash, there were few places to hide. Over the past 12 months the fund returned 36.5% vs 42.9% for the index with stock selection being the primary detractor. More recently this trend has started to reverse.

Pets at Home Group, DFS Furniture and Bytes Technology Group were some of the best performers over this period. Engineering company Weir Group also contributed to returns following the rise in commodity prices. The manager has since sold this position to take profits. In contrast, public services provider Serco, residential property company Grainger and investment manager Ashmore group were some of the biggest detractors. Specialist insurer Lancashire Holdings was another notable underperformer as the insurance sector continues to face pandemic related losses and a lack of enthusiasm from investors. We think Bullas has the experience, skill and team support to continue delivering good long-term returns although there are no guarantees.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2021. **A Inc share class used to extend performance history.

Find out more about Franklin UK Mid Cap including charges

Franklin UK Mid Cap Trust Key investor information