Paul Spencer, manager of the Franklin UK Mid Cap fund, talks to Maria Merricks about his past and present portfolio positioning.
The fund is the best performing over ten years in the UK All Companies sector. What is the secret to your success?
It has obviously been very helpful to overall performance that the fund’s benchmark index, the FTSE 250, has substantially outperformed the FTSE 100 over the last decade. This means mid-cap funds generally have been among the best performers in the UK All Companies sector.
With regard to the fund’s outperformance, the application of a consistent long-term investment strategy has been an integral part of the success. We run a high conviction portfolio and currently there are 39 investments with the smallest 1.5% and the largest 4% of the AUM. All these companies are constituents of the FTSE 250.
I am not sure there is any particular secret to the success but as Sir John Templeton said: “It is impossible to produce a superior performance unless you do something different from the majority.” We must be doing something different.
Paul Spencer, manager of the Franklin UK Mid Cap fund
What qualities do you look for in a company?
The style of the fund is pretty agnostic towards either value or growth. This means there is not really any rigid profile for a company to invest in for the fund. Perhaps slightly counterintuitively, my starting point is usually to eliminate companies from my investable universe with inappropriate risk/reward profiles. This essentially involves analysing business, balance sheet and management risk and finding companies not to buy. Whatever is left is then valued to assess whether the company is attractively priced. For this stage, we rely very heavily on our own proprietary valuation models.
What has been your most successful investment of the past five years?
The most successful investment is Ashtead, the construction equipment plant hire business, where the initial investment was purchased in late 2009 when price was below 100p. At the time, the valuation was dominated by negative views caused by the weakening outlook for construction activity in the US economy and the high absolute level of borrowings.
We felt there was a huge opportunity due to the structural change taking place in its US customer base that was increasingly renting rather than buying equipment. In addition, its competitors were increasingly unable to expand or modernise their rental fleets due to weak underlying finances.
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