by Jake Moeller.
Jake Moeller reviews highlights of presentations by Colin Morton, CIO & Portfolio Manager; Ben Russon, Portfolio Manager; Richard Bullas, Portfolio Manager; and Paul Spencer, Portfolio Manager of Franklin UK Managers’ Focus Fund on November 4, 2014, and April 2, 2015.
Leeds is not on the tip of investors’ tongues when they think about the key centers of U.K. equity fund management. However, there—only two hours north of London—resides the core of the former Rensburg Fund Management team, which was cannily acquired by Franklin Templeton in 2011. Quietly (and perhaps wisely) left to its own devices by Franklin, the team has been busily building a compact suite of funds, each with compelling performance results.
Franklin UK Managers’ Focus Fund is a “best ideas” portfolio that derives from the top stock picks from the five portfolios managed by Mr. Morton (Franklin UK Equity Income and Franklin UK Rising Dividend), Mr. Spencer (Franklin UK Mid Cap), Mr. Russon (Franklin UK Opportunities), and Mr. Bullas (Franklin UK Smaller Companies).
This fund avoids the potential risk of appearing “gimmicky” by not having arbitrary decision rules that simply take the top stocks in each underlying fund and place them on an equally weighted basis into a consolidated portfolio. Duplication and ranking is very carefully considered, debated, and with the support of former UK Select Growth (predecessor fund to UK Opportunities) manager Mark Hall a genuine and sensible high-conviction portfolio emerges. Indeed, the process appears to act as an optimizer for the managers, with the Focus fund performing better than the sum of its parts. Using the Private Assets Module in Lipper for Investment Management, an equally weighted portfolio of each of the four managers’ respective funds (rebalanced quarterly) has actually been outperformed by the Focus Fund by over 11% in the last three years. No manager can own a stock in the Focus fund which is not in their respective portfolio.
Table 1.Three Year Performance of Franklin UK Managers’ Focus Fund V Peer Groups and Equally Weighted Composite of Underlying Funds (to March 31, 2015)
The fund managers are initially concerned about selecting stocks in accordance with their own methodology and in their respective peer groups before offering their top stocks to this fund. Mr. Morton’s component is ten large-cap stocks, and Mr. Russon contributes ten stocks from across the FTSE All Share (excluding investment trusts). Mr. Spencer’s component is ten mid-cap stocks, and Mr. Bullas—dealing in the less liquid small-cap space—has a budget of 20 stocks (however, this is rarely used, with only 12 stocks currently sitting in this component). This results in a portfolio of no more than 50 stocks, with an overall bias to small- and mid-cap stocks.
The machinations of this fund are such that the increased volatility one might expect from a small-/mid-cap bias are negated to a certain extent by a lack of exposure to cyclicality overall. All the fund managers have a fairly conservative, valuation-based methodology in their portfolios, and a quality bias is certainly evident. The most recent member of the team, Mr. Bullas, has materially changed the composition of his UK Smaller Companies fund from the higher-risk, micro- and resource-based stocks preferred by his predecessor Stuart Sharp to the top end of the small-cap spectrum.
Table 2. Multi Period Performance of Franklin UK Managers’ Focus Fund (to March 31, 2015)
The fluidity across the fund managers is a definite advantage in this fund. For example, where Mr. Morton has to sell a stock from his Income portfolio when it no longer meets income criteria, it can be allowed to “run” in the Focus fund. Similarly, where Mr. Spencer has seen mid-cap stocks such as Ashtead Group and St. James’ Place rally into the FTSE 100, he effectively becomes a “net giver of cash” to Mr. Morton, who is able to allocate these stocks into his component (if the underlying thesis remains robust).
There is a natural demarcation of sectors at the higher-cap end of the fund, so Mr. Morton is more likely to deal with pharmaceutical and tobacco stocks than the other managers. The potential for stock and sector overlap/divergence is higher within the remaining fund managers (e.g., for differing reasons Mr. Spencer prefers Howden and Mr. Bullas Topps Tiles in building materials but both might not be included in the Focus fund). Similarly, Bovis and Bellway are both in the top ten holdings of Mr. Spencer’ own fund; he wouldn’t proffer both for the Focus fund. Hence, these situations and anomalies are debated by the fund managers and Mr. Hall to ensure the composition of the Focus fund remains “sensible.” Additionally, the discussion in turn serves as extra due diligence to each fund manager’s individual portfolio.
Table 3. Two Year Share Price Performance of Topp Tiles Vs Howden (to April 7, 2015)
A remarkable feature of this operation is the camaraderie the group. You would be hard pressed to meet a more approachable and passionate team of fund managers. There is no hubris or assumption here and a quiet, open-plan office, away from the noise of London, encourages the collegiate atmosphere. Naturally, individual stock risk remains. For example, Mr. Spencer invested in Just Retirement just before the high-profile pension reform changes to annuities in the 2014 budget, and this caused some pain. However, five separate conduits of intellect feeding into a compact portfolio ensure that new and diverse opportunities are being considered, shared, and implemented.
For those fund selectors and fund-of-funds managers who religiously monitor their style biases, this fund might be difficult to blend into a portfolio. However, for a financial planner or investor who is looking for a concentrated portfolio with intellectual input from a number of managers (and without the fee duplication a fund-of-funds structure would require), a visit to Leeds may well be worth considering.
Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.