Focus Fund is ‘shop window’ for UK portfolios

This article is part of
UK Equity Investing - May 2014

For the highly experienced team behind the Franklin UK Managers’ Focus fund, there is an extra incentive to deliver strong returns: it acts as a shop window for the portfolios they run as individuals.

The £45m fund is constructed by combining the highest conviction stock ideas from Franklin Templeton’s leading UK fund managers who are specialists in different areas of the market.

This means the pressure is on everyone to ensure they’re always operating at the very top of their game, according to Colin Morton, one of the Leeds-based investment team and the manager responsible for blue chip names.

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“Investors will look at this fund and if it’s doing badly then it won’t reflect well on us as a team because all the stocks are the managers’ best ideas and feature in their own funds,” he explains.

“That’s why it’s so important we do well.” The past year has certainly been hugely successful. In the 12 months to the end of March 2014, the fund was up an impressive 30 per cent – compared to the modest 9 per cent rise achieved by the FTSE All-Share.

“We had an amazing 2013 but wouldn’t expect to achieve that every year,” warns Morton. “It was down to picking lots of good stocks, missing the bad areas, and the tailwind of being overweight mid- and small-cap names.” The stated aim of the fund is to achieve a total return exceeding that of the FTSE All-Share Index over the medium to long term, which is defined by the team as being between three and five years.

The four managers – Colin Morton, Paul Spencer, Richard Bullas and Ben Russon – have a combined 80 years’ experience and have successfully navigated their way through various economic storms and recessions.

At least 50 per cent of holdings are in mid- and small-cap names due to the fund’s structure, although it’s likely there will be a third in large-caps, a third in midcaps and a third in small-caps.

“We don’t have to own anything we don’t like and can take large bets against the market,”adds Morton.

Although each of the managers involved in the fund’s construction have a slightly different focus, there is a commonality of approach when it comes to what they look for in a potential holding.

For example, all of them will look at the absolute value of the company, which will take into account the market capitalisation, any debts, and outstanding liabilities such as pension deficits.

“It’s very much a fundamental approach to investment. We’re looking for good, high-quality businesses,” explains Morton. “We want strong balance sheets and prefer not to buy companies with loads of debt.” Good management teams at the helm are also important. Particularly favoured will be those who have aligned themselves with shareholders, such as through buying stock themselves or paying excess cash back to investors.

“Valuation is probably the most important factor of all,” he adds. “It’s no good finding really great companies with strong balance sheets and management teams if you’re paying a huge multiple for them.” A good example is Sage, the accountancy software firm whose systems are embedded in smaller businesses and run the VAT, payroll and other administrative services for an annual or monthly fee.