Mr Morton, who co-manages the £274m Franklin UK Equity Income fund with Ben Russon and Mark Hall, noted that while the team had been “active” during the two major sell-offs of the year – in early 2016 and immediately following the Brexit vote – opportunities had since become less obvious.
“It has been a trying year,” he said. “There have been two major events. You had Brexit, but earlier this year you also had the sell-off in January and February when there were worries about global growth. Those big opportunities have happened.”
In the wake of the early 2016 slump the team took profits from “more cautious” holdings in order to buy cyclicals, putting money into emerging markets investment specialist Ashmore and polymer provider Victrex.
Following the Brexit vote, the managers, who usually have 70 per cent of the fund in the FTSE 100, sold down defensive holdings and recycled money into domestic names, adding to house builder Persimmon, paving specialist Marshalls and recruitment business Michael Page.
“Those companies had strong balance sheets but some share price falls,” Mr Morton said.
The team then pared these positions in turn after a subsequent rally, resulting in them selling out of Marshalls entirely. And while Mr Morton noted that the “dust has settled” in the UK economy, recent developments have left him unsure of how to position the portfolio.
“Now the pound has gone down further, we have got more sterling weakness and a big rebound in the oil price,” he explained. “The concern we have got for consumer stocks now is trying to have a clearer picture for 2017.
“It looks like we will have rising inflation. We will have a consumer struggling with price increases, [fuel] bills and food prices. It’s going to be a crunch for the consumer. I’m very nervous about this outlook.”
Mr Morton noted that while he was happy some consumer-focused names – such as top-10 holdings Unilever and Diageo – could withstand such headwinds, uncertainty remained about the extent of the inflation rise, and whether domestic names could pass on price increases if necessary.
“We are trying to find the companies that have the ability [to pass on inflation]. They’re easy to find globally – your Unilevers and Diageos. The UK’s a very small part of what they do.
“With most of the domestic UK companies, how much pricing power do you have? We could see some inflationary pressures – it’s too early to say.”
Meanwhile, though some share prices have begun to slip, Mr Morton is unsure of how attractive these levels look.
“[Valuations] are not at the lows they were at,” he explained. “Persimmon fell from £22 [a share] on Brexit to below £13. Then they went back to £19. Now it’s back down to £17. Yes, they are down 20 per cent from before Brexit, but much higher than the bottom.”
On the international front, Mr Morton continues to favour Imperial Brands and British American Tobacco. “The ultimate pricing power is in cigarettes,” he said. “It has probably gone from 50p to £10 a pack.”
According to FE Analytics, Mr Morton’s fund has returned 31.7 per cent over three years, compared with 19.2 per cent from the IA UK Equity Income sector.
Key numbers
77%: Weighting to the FTSE 100 in Franklin UK Equity Income
1%: Level of UK inflation recorded in September
