Spencer overhauls Franklin UK small-cap fund

Franklin Templeton’s mid-cap manger Paul Spencer is starting to turn around performance on his newly-inherited small-cap portfolio after he disposed of almost half its holdings.

Spencer (pictured) and co-manager Richard Bullas took over the underperforming Franklin UK Smaller Companies fund from Stuart Sharp at the end of June last year, and have since sold 28 of the 59 stocks in the portfolio.

The pair have now concentrated the portfolio and introduced a strategy similar to that employed on Spencer’s top-performing £624m UK Mid Cap fund.

“There is only so long the market will give you credit for it not being your fund. We decided that was about two months, so we set about the restructure fairly aggressively, selling 28 holdings – equivalent to 35% of AUM,” Spencer said.

The portfolio now holds 40-45 investments, with positions accounting for between 1.5% and 5% of the fund’s assets. It is focused on stocks with a market cap of between £100m and £1bn.

This change in strategy led to the disposal of low conviction positions, AIM or overseas-listed holdings, and a number of mining and oil & gas exploration stocks.

Spencer and Bullas sold no fewer than ten mining stocks, the majority of which were gold miners, as well as stocks including Falklands exploration firm Borders & Southern, sausage skin maker Devro and a number of engineering companies.

Early purchases included more high-profile companies such as retailer Ted Baker, Restaurant Group, and housebuilder Bovis, as well as asset manager Polar Capital.

“I have nothing against oil & gas production stocks as such, but I did not want to cram the fund with those kind of binary positions. It was an unnecessary overweight,” he said.

Early performance has been encouraging and the £18m fund is second quartile among its UK small-cap peer group over the three months to early January, according to FE.

The manager said the greater reach provided by Franklin Templeton, which acquired his former employer Rensburg in 2010, has proved beneficial.

“Franklin Templeton has a dealing business in Edinburgh, which really made a lot of difference to our ability to dispose of stocks.  The dealers did a brilliant job in exiting positions,” he said.

Spencer sees opportunities for the fund arising from the increasing lack of broker coverage, as well as ideas on which he has been unable to capitalise in the UK Mid Cap fund.

“There are huge swathes of brokers dropping out of mid- and small-cap research, which gives us the chance to do it ourselves. There are also a few cases of stocks I really liked the look of in the past, but have been a bit small for the Mid Cap fund.”

Franklin UK Smaller Cos vs sector average:

franklin-uk-smaller-cos-vs-sector-average

 

This article was first published on Investment Week

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