Ben Russon has been at the helm of the £88m Franklin UK Opportunities fund since 2013 and runs the portfolio with a large-cap bias.
“We’re looking for long-term capital appreciation through a long-only equity portfolio, and trying to produce a return that’s superior to the [FTSE] All-Share [index] on a long-term basis,” he explains.
Mr Russon’s process is high conviction, a case of “finding the right ideas and backing them”. His long-held view is that “we’re in this lower-for-longer world”, where there are lower interest and growth rates and higher levels of debt in the global economy. He believes this means equity returns will also be lower. “That really does shape the positioning of the portfolio and helps define what I mean by UK opportunities,” he says.
“If you imagine we are facing an investment backdrop that is going to have a greater level of volatility [with] a lower level of overall returns, in order to counteract that you need a portfolio that has an element of defensive bias. The fund has a reasonable allocation of capital towards more stable calls, areas such as pharmaceuticals and tobacco, where you have less economically sensitive business models paying out decent dividends and taking less valuation risk.”
Mr Russon tries to complement these holdings with those where he sees greater potential for capital appreciation. He explains: “In the structural growth areas of the market, you have an overarching growth driver that provides a following wind for the business and should be able to generate a greater level of capital growth on a longer-term basis.” On the capital preservation side, the manager places emphasis on free cashflow yields and the cash that firms are producing, on the basis that “it gives you a truer picture of the prospects of returns for the company”.
While it is a stock-picking approach, he pays attention to macroeconomic factors, although he points out equity markets are not always driven by economic cycles long term. He says: “From a UK equity investment perspective, because the UK index is so global and the UK market is not really a play on the UK economy, you need to take a view on what you think is happening in the wider world as it will obviously influence the prospects for a lot of the names [in the fund].”
It may have a large-cap bias, but he found himself adding names lower down the market-cap scale in the latter stage of last year. “I think that was a function of the fact mid caps had a bit of a shake-out in 2014 and some interesting value opportunities started to emerge,” he adds.
The clean retail W accumulation share class has ongoing charges of 0.85 per cent, while the fund is considered at a level five on a risk-reward spectrum.
The fund has delivered a respectable long-term performance to investors, although it has notably outperformed in the past 12 months to March 17 as the manager has settled into running the portfolio. During the period it returned 10.47 per cent compared with the Investment Association UK All Companies sector average of 5.50 per cent, data from FE Analytics shows.
Across five years to March 17, the fund delivered 57.48 per cent, slightly below its peer-group average of 59.59 per cent but beating the FTSE All-Share index, which rose 51.39 per cent.
Mr Russon notes the overall UK equity market “struggled to make any meaningful headway” in 2014, although the fund did manage to outperform in what was a fairly flat market.
“We have names in retail – Next and Dixons Carphone – both of which benefit from the structural growth provided by the internet,” he says. “Next Directory is an online clothing retailer and Dixons Carphone benefits from the ever-increasing connectivity in the world and the fact we’re getting convergence between electronic and mobile devices.
“They’re not just straight plays on the domestic retail outlook, they obviously have structural [tailwinds] and they have both performed very well for the fund in the past year.”
Turning to a holding that has detracted from performance, he concedes: “One of the big setbacks last year was holding Just Retirement, which is an enhanced annuity provider. The portfolio does have names that are exposed to our need for long-term savings because I think given the demographics of the UK, that is obviously an area of structural growth.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
Franklin Templeton has experimented with UK equity offerings before, but it has only been since the acquisition of Rensburg in 2011 that it has looked anywhere convincing in this space. The fund is a reasonable size to correlate performance to assets and is under the radar of most buyers and buy lists. The portfolio is run by an equity team of Ben Russon, supported by Colin Morton and Mark Hall. This is a concentrated stock-picker fund with around 30 to 40 holdings. Top-10 holdings contain plenty of 4 per cent index positions, such as tobacconists Imperial and BAT. Overall, the team is running key factor risk in consumer stocks (the largest sector overweight) and oil and gas.
