It has been a volatile year for the UK stock market. Concerns over the UK’s economic prospects following the UK’s vote to leave the EU saw investors favour larger, globally-exposed companies. In contrast, higher-risk small and medium-sized companies, which are typically more reliant on the health of the UK economy, were shunned.
Paul Spencer reduced the Franklin UK Mid Cap Fund’s exposure to UK-focused companies in favour of companies with greater overseas earnings prior to the vote. However, the fund’s broader exposure to medium-sized companies dragged on performance in the immediate aftermath of the referendum. Investments in companies with the greatest exposure to the domestic economy, such as housebuilders and retailers, were particularly painful amid rising concerns that consumer demand may slump.
That said, Paul Spencer feels many of the domestically-focussed companies he invests in were unfairly dismissed and that their longer-term prospects remain intact. He took advantage of the market volatility by taking profits from companies that earn a greater proportion of their earnings overseas and using the proceeds to add new investments in UK-focussed companies at reduced prices. This includes greetings card retailer Card Factory and logistics facilities specialist Tritax Big Box. The manager believes both are resilient and stable companies that pay attractive dividends.
While a focus on medium-sized companies held back returns, poor stock selection has detracted further from the fund’s performance this year. An investment in Restaurant Group, for example, was particularly painful after announcing weaker sales growth. Paul Spencer has maintained the position, however, following a change in management. Elsewhere, a lack of exposure to the mining sector, which has performed strongly this year, also hurt performance.
Going forwards, the manager continues to focus on high-quality businesses with strong balance sheets and cash flows and solid management teams, which are trading on attractive valuations. He is also optimistic in his outlook for merger and acquisition activity, as sterling’s weakness against the world’s major currencies may encourage overseas businesses to acquire UK businesses at cheaper prices. He believes this could benefit a number of companies in which he currently invests.
Our view on this fund
Paul Spencer is an experienced fund manager with a talent for identifying successful medium-sized businesses that subsequently progress to the FTSE 100 of the UK’s largest companies. While the fund has been through a short-term period of weaker performance, our analysis indicates the manager has added value through strong stock selection over the long term. Since taking over management of the fund in March 2006, the fund has grown 218% compared with 157.6%* for the FTSE 250 index, although past performance is not a guide to future returns.
|Annual Percentage Growth|
| Nov 11 -
| Nov 12 -
| Nov 13 -
| Nov 14 -
| Nov 15 -
|IA UK All Companies||14.0||26.5||0.2||6.6||8.1|
|FTSE 250 (excluding investment trusts)||25.3||33.2||2.0||15.3||3.1|
|Franklin UK Mid Cap||25.9||34.0||-0.2||18.1||-2.5|
Past performance is not a guide to future returns.
We feel this fund remains an excellent choice for pure exposure to medium-sized firms over the longer term and it maintains its place on our Wealth 150+ list of our favourite funds with lower charges. Please note the annual Vantage charge of up to 0.45% also applies.
Investors should note this fund is a concentrated portfolio, which means each holding can have a significant impact on returns; therefore, this is a higher-risk approach.