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18th March 2016

Franklin UK Mid Cap manager Paul Spencer discusses opportunities past, present and future

Paul Spencer, manager of Elite Rated Franklin UK Mid Cap, celebrated his 10th anniversary running the fund last month. During that time, the fund has returned 227% compared with 147% for the FTSE 250*. Here, Paul talks about opportunities past, present and future.

How has the portfolio changed in the past decade?

It's been an interesting 10 years. We've had a 55% peak-to-trough fall to cope with in 2007-2008, the market fell 20% in just 3 months in 2011 and, in each of the past two years, we've seen the market fall at least 10% at times. Invariably, when you look back on these periods, they usually produce good opportunities to put money to work.

During this time, the stock names may have changed, but the shape of the portfolio is broadly similar. It's a pure FTSE 250 fund. If you want mid-cap exposure, that is what we do. If a stock grows and enters the FTSE 100, we sell it. If it shrinks and falls out into the small cap space, we sell it too. I've maintained a pretty consistent number of stocks (around 40) and turnover tends to be pretty low. Last year was probably one of my quietest, with just 10 complete disposals and 10 new investments.

How has the fund performed more recently?

Medium-sized companies did very well last year – up 12%, compared with a fall of 1% for the UK's largest companies. From a sector perspective, I won't underplay the contribution that having nothing in the oil and gas and mining sectors added, but individual stock choices also had a big impact. Regis returned 62%, Betfair 100%, for example.

What do you see as the big themes in 2016?

House builders and building materials are a theme we are following. We are overweight that sector, owning Bellway, Ibstick and Bovis. We also own SIG, which has got quite a bit of new build exposure in the UK.

We've also been trying to increase our exposure in the healthcare and pharmaceutical space. Although we are overweight financials, the devil is in the detail as we're very underweight real estate and non-life insurance, preferring asset managers instead.

I think mergers and acquisitions are likely to continue, and dividend growth in this area of the market is still pretty strong.

One difference is that I think there is now more value in some non-UK stocks, so we've added a little more global exposure to the fund. 50% of the profits from the companies I invest in still come from the UK, but around 18% is now coming from the US, 17% from Europe, and the remainder from Australasia, Asia Pacific and emerging markets.

Why should an investor consider putting money into a mid-cap fund?

In the 10 years that I have overseen this fund, investors have often asked me why they should invest in mid-caps. My answer is, why wouldn't you? It's not just about size and finding the FTSE 100 companies of tomorrow – they are also higher growth businesses at an earlier stage of their cycle. And companies are in a wider range of industries, so there are more opportunities.



Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Paul's views are his own and do not constitute financial advice.

*Source: FE Analytics, 1st February 2006 to 1st February 2016, total returns, GBP.