Franklin Templeton duo doubles cash on possible outflows

Paul Spencer and Richard Bullas are running an elevated cash position in Franklin UK Mid Cap as a prudent measure against potential outflows due to management changes on the fund.

Earlier this month it was announced that Spencer is stepping back from the funds he is a named manager on at the end of June before retiring at the end of September. As part of the succession plan, Bullas will take over as lead manager of the mid-cap fund.

Speaking to Portfolio Adviser, Bullas (pictured) said to protect against potential outflows the duo bumped up the fund’s cash position to between 5% and 7%, compared with its typical 2% to 3%.

“We have run a slightly elevated cash level in anticipation there may be some redemptions on the back of Paul’s announcement,” said Bullas. “Once we get a feel for how these meetings [with investors] are going to go and how investors and clients feel about it, we will start to look and deploy that cash in the portfolio possibly in two or three new positions.

“We will be doing that jointly together in the next six months but there will be no wholesale changes.”

Bullas said another reason the cash position is higher than usual is because the fund received bid money from its holding in Entertainment One at the end of last year. The television production company was acquired by Hasbro for £3.3bn in a deal which completed on 30 December.

Morningtar flows data on the Franklin UK Mid Cap fund is only available at the month end so it does not have information on flows into or out of the fund since 7 January. Throughout 2019 the fund saw net inflow of £399m, according to Morningstar figures, with £106m entering the fund in December alone (see table below).

Bullas said there have been no material outflows since the announcement.

“I’m touching wood as I speak,” he added. “I think clients have really understood that Paul is retiring and it’s been thought about. This is not a cliff-edge event, this really has been a build-up and a process and evolution of that and people can see the natural succession planning.”

Franklin UK Mid Cap Fund flows in 2019

Source: Morningstar

Looking to domestic earners

In terms of opportunities, Bullas said the pair was likely to allocate to domestic earners over Q1 and Q2. At present, 52% of the portfolio is in overseas earning companies and 48% in domestic earners.

“Given the cash balance… our strategy is to look a lot harder at some of the domestic companies now,” he said. “We think that hopefully momentum is starting to build in the economy and the big issues are out the way.”

Over the past year the fund has returned 32.6% versus the FTSE 250 index’s 22.3%, according to FE Fundinfo data. It has outperformed over all other periods and is top quartile over one, three and five years.

Bullas said: “I am saying to clients, ‘listen, he [Spencer] has had a fantastic year, don’t expect year in year out that sort of outperformance. Let’s try and rebase expectations somewhat’. Does it produce pressure for me? I don’t think so, no extra pressure.”

Ratings agencies spilt over fund’s future

Hargreaves Lansdown said it was sticking with the fund for its Wealth 50 and Morningstar maintained its silver rating, saying it did not anticipate changes to the team-based investment approach.

Morningstar senior manager research analyst Samuel Meakin said: “However, his retirement will represent a loss of proven stock-picking ability and significant experience in the UK small and mid-cap space.”

Fund Calibre removed the fund’s elite rating on the news because its ratings process starts with a manager’s alpha generation, while Square Mile removed the fund’s A rating on the basis Spencer is “integral to the rating”.

Fund buyers told Portfolio Adviser after the announcement they were reassured by Franklin Templeton’s succession plan.

Bullas said: “The focus for us is to have continuity of how we how we run money in the portfolio in terms of the strategy, style and process and that will not change. We’ll be looking at things the same way through the same lens.

“We will continue to be 100% a FTSE 250 fund so I’m not going to start buying FTSE 100 or small cap stocks, it’s going to retain that 35 to 40 stock discipline; I’m not going to be putting 50 stocks in there and having a huge portfolio. We are going to retain very much what Paul is doing now and in the future, and I do believe with the process we can continue the outperformance.”

Performance of Franklin UK Mid Cap versus benchmark

Source: FE Fundinfo