The top-performing Franklin UK Mid Cap fund is taking a contrarian bet on the unloved oil and gas sector after banking significant profits from property companies.
Paul Spencer’s £1.1bn fund is the sixth best performer in the IA UK All Companies sector over one year, and the strongest contributor to recent performance has been the housing sector.
UK housing has gone from strength to strength, buoyed by the government’s Help to Buy scheme, fewer competitors and the wider economic recovery.
The fund has been overweight the sector since 2009, but Mr Spencer said he was now “finding more competitive parts of the market offering more value”.
He has cut his housebuilding exposure and recycled the cash into the troubled oil and gas sector, which was rocked by a six-year low in oil prices in March.
Mr Spencer admitted the shift was “slightly counterintuitive”, but said the housing sector was a “different proposition” to when he purchased the unloved stocks post-financial crisis.
“These stocks performed unbelievably well. We are very impressed by what the likes of Howdens Joinery have done, but we think risk-reward is far less attractive than it was four or five years ago and [we] can find better ideas.”
He has reduced the housing sector from a 500 basis point (bps) overweight to 250bps, selling down exposure to residential landlord Grainger and selling out of Howdens.
The fund has bought into Hunting, a supplier to the oil and gas industry, and services company Wood Group.
“Only time will tell whether I’m finding great value or being sucked into a value trap because of the low oil price, but if you get any recovery in the price and in the capex spending of the oil majors, there should be a fairly quick recovery,” he said.
However, Mr Spencer has only bought into the “picks and shovels” companies rather than the “exploration” side of the industry, which has high capital requirements and carries some geopolitical risk.
While Mr Spencer said the size of his £1.1bn fund was not a concern, he admitted it had hampered the fund’s ability to get into mid caps on the edges of the FTSE 250 due to liquidity issues.
“Around the periphery… some stocks in the [FTSE] 250 are too illiquid to buy in the timeframe, or I would have to end up buying more than I wanted to own,” he said.
The FTSE 250 index took a beating in the second quarter of 2014 when Bank of England governor Mark Carney signalled a potential interest rate rise, harming the case for domestic stocks.
The manager said that while the fund has lost £150m in outflows since then, this has been balanced out by market movement.
Over one year to the end of May, the Mid Cap fund has returned 22.3 per cent, compared with a 10.5 per cent rise in the IA UK All Companies sector. In three years the fund has returned 96 per cent, compared with a 62 per cent rise for the sector, according to data from FE Analytics.
