Focus Fund is ‘shop window’ for UK portfolios

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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.

“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.

“It’s very much a recurring income model and should benefit from the fact that small-and medium-sized enterprises tend to benefit most in a recovery phase,” explains Morton. “We like the fact that the management really seems to be tuned in to trying to improve top line growth but are also returning money to shareholders.” The fund adopts a pure bottom-up approach and that is perfectly illustrated by the sectors in which it has overweight positions. Take the industrial goods and services sector, for example, which is where about a quarter of the fund’s assets under management are invested.

“When you look at companies in this area you realise they are completely different types of businesses,” he says. “We hold RWS, which is a translation business, but we also hold a position in plant hire firm Ashtead.” Unsurprisingly, given this bottom upstance, holding periods and turnover are dependent on market movements. If the market suddenly moves up 30 per cent and every stock in the portfolio hits their price targets then a lot will be sold.

“We try to buy companies that we think could be in the portfolio for a long time,”says Morton. “In fact, I wouldn’t be surprised if a lot of our current holdings are still there in three years’ time.” There are three reasons why a stock might be sold: valuations no longer looking attractive; a company suddenly going off tangent and doing something out of character; and changes in the industry that couldn’t have been predicted.

“Due to being a high conviction portfolio it may have really good and really bad months relative to the benchmark – just hopefully more of the former,” says Morton. “We’re very optimistic we can find plenty of decent ideas.” He’s also keen to challenge the idea that a focused best ideas fund which is heavily concentrated in the small and mid-cap areas is a lot riskier than a portfolio with a large-cap bias.

“It’s all about how you define risk,” he says. “A lot of people go down the tracking route but the FTSE contains Shell, which is 8.4 per cent of the market, and HSBC which is seven per cent. That’s 15 per cent of your money in just two stocks.” It’s a similar story with sectors.

“There is 17 per cent of the FTSE 100 in oil and 13 per cent in banking,” he says

“Therefore if you buy a tracker you will have 30 per cent of your money invested in just two areas.” Morton believes having a very experienced team that selects the best ideas from across the market cap scale and shuns any derivatives or hedging techniques makes this fund attractive for those wanting a solid UK-focused product.

The key, however, will be finding decent stocks with good growth potential on reasonable valuations.

“Whether the portfolio succeeds or not will be down to the stock picking of the team – it’s as simple as that,” says Morton. “The managers running this fund have great track records and are very confident of being able to deliver for investors.”